Chapter 22 - Irish Fiscal Advisory Council

Mr. Derek Moran (Secretary General, Department of Finance) called and examined.

Today we are dealing with appropriation accounts for 2017, Vote 7 - Office of the Minister for Finance, and the finance accounts for 2017. We are also dealing with the Comptroller and Auditor Generals report for 2017, chapter 1, which deals with the Exchequer financial outturn for 2017, and Chapter 22, the Irish Fiscal Advisory Council. We are also dealing with the Comptroller and Auditor General's special report No. 105 on Ireland's transactions with the EU in 2017.

We are joined from the Department of Finance by Mr. Derek Moran, Secretary General; Mr. John McCarthy, assistant secretary and chief economist; Mr. Gary Tobin, assistant secretary, banking division; Ms Mary McSharry, head of corporate affairs; and Mr. Fiachra Quinlan, finance officer. We are joined from the Department of Public Expenditure and Reform by Mr. Brian O’Malley, principal officer; and Ms Vicky Cahill, assistant principal.

I remind members, witnesses and those in the Public Gallery that all mobile phones must be switched off or placed in airplane mode as merely putting them on silent will interfere with the sound recording system.

I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they 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.

Members of the committee are reminded of the provisions within Standing Order 186 that the committee shall also refrain from enquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

While we expect witnesses to answer questions asked by the committee clearly and with candour, witnesses can and should expect to be treated fairly and with respect and consideration at all times, in accordance with the witness protocol.

I invite the Comptroller and Auditor General to make his opening statement.

Mr. Seamus McCarthy

The annual finance accounts present the receipts into and issues from the Central Fund of the Exchequer, together with a set of statements and schedules that itemise the transactions. In addition the financial statements of the national debt, which are prepared by the National Treasury Management Agency, are presented in full as part 2 of the finance accounts. The accounts for 2017 were certified by me on 28 June 2018. I can inform the committee that the accounts for 2018 are expected to be certified in or around the same timeframe this year.

Chapter 1 of my report on the accounts of the public services is designed to summarise the transactions on the Central Fund recorded in the finance accounts in a more accessible format and to highlight relevant trends in such transactions. In addition, because the finance accounts do not include any kind of statement of financial position, the chapter provides an overview of key Exchequer assets and liabilities at the year end. Exchequer receipts in 2017 totalled €58.4 billion, representing an increase of €3.3 billion, or 6%, compared with 2016. Issues from the Central Fund in 2017 amounted to €56.5 billion, which was a year-on-year increase of €395 million, or just under 1%. The surplus of receipts relative to issues for the year was €1.9 billion. The gross national debt stood at just under €199 billion at the end of 2017. This was marginally higher than at the end of 2016. The cost of servicing the national debt fell from €6.8 billion in 2016 to €6.2 billion in 2017. That was a drop of 9% year on year. This reflects the impact of the refinancing of debt by the National Treasury Management Agency.

Members may wish to note that in 2017 the Department of Finance commenced publication of an annual report on public debt in Ireland. This provides useful information and commentary on the composition and evolution of Irish Government debt, on measures of debt sustainability, and on progress towards achievement of debt targets. As a consequence, I have reduced my own reporting on the public debt, which was intended to address the previous information gap.

Turning to the special report, in addition to many other responsibilities, the Department of Finance represents Ireland’s interest in the EU budgetary process and EU policy formulation. Schedules to the finance accounts show payments from the Exchequer to the EU and receipts into the Exchequer from the EU. However, this is only a partial view of Ireland’s transactions from the EU, which flow through many sets of financial statements. In fact, there is no single source that gives a complete overview of such transactions. Against the background of Brexit, negotiations for a new EU multi-annual financial framework and European Parliament elections, I felt it might be useful to provide such an overview. This resulted in the special report before the committee today.

As the figure which can now be brought on screen indicates, financially Ireland was a net beneficiary of the EU up to 2014. Since then, Ireland has received marginally less than it has contributed. Ireland’s contribution to the EU budget is linked substantially to Ireland’s economic activity levels, with elements related to VAT collected, customs duties imposed in Ireland, and gross national income levels. The Irish contribution in 2017 totalled €2 billion. The Department of Finance has projected that the contribution is likely to increase significantly in future years. Ireland received a total of €1.8 billion in EU funding in 2017. Over 80% of the amount received was in respect of agriculture and rural development. As members are aware, this funding makes a significant contribution to the viability of farming in Ireland. Approximately 90% of EU funding received in 2017 was administered through central government Departments. The remaining 10% went directly from the EU to public bodies, bodies in the private sector in Ireland or was spent on EU bodies operating in Ireland. I recommended that there should be annual reporting on a consolidated basis of Ireland’s EU transactions, but the Accounting Officer was not convinced of the need for this.

The 2017 appropriation account for the Vote of the Office of the Minister for Finance records gross expenditure of €34 million. There was a net underspend of €7.2 million, relative to the Estimate, which was for surrender at the year end. The appropriation account presents expenditure under three expenditure programmes. These relate to the costs incurred in 2017 in respect of economic and fiscal policy, on which the Department spent €18.9 million, banking and financial services policy, on which the Department spent €8.1 million, and provision of shared services, on which the Department spent €7.1 million.

The expenditure on banking and financial services policy recorded in the appropriation account does not include costs associated with staff seconded to the Department from the NTMA to deal with banking sector issues and certain related consultancy costs. Those costs are borne by the NTMA and are not recouped from the Department.

The Fiscal Responsibility Act 2012 requires me to report to Dáil Éireann each year with respect to the correctness of the sums brought to account by the Irish Fiscal Advisory Council. Chapter 22 is my report for 2017. I gave a clear audit opinion on the council’s financial statements for 2017 when it incurred expenditure of €607,000.

Mr. Derek Moran

I thank the Chairman for giving me the opportunity to address the committee. With me today are Mr. John McCarthy, chief economist, Mr. Gary Tobin, head of our banking division, Ms Mary McSharry, head of corporate affairs, and Mr. Fiachra Quinlan, finance officer. Also joining us is Ms Marie O'Neill.

I will focus on the specific items on today’s agenda and give a brief flavour of some of the departmental performance and outputs in the period. The items on today’s agenda are chapters 1 and 22 from the Comptroller and Auditor General's report for 2017, the appropriation accounts 2017 - Vote 7, the finance accounts 2017, and the Comptroller and Auditor General’s special report on Ireland’s transactions with the EU in 2017.

The Estimate for the Department of Finance for 2017 was set at €40.8 million, that is, €39.5 million net of appropriations-in-aid available and the capital carryover of €200,000. The net outturn for 2017 was €32.5 million, leaving a surplus to be surrendered to the Exchequer of approximately €7.2 million. This surplus arose for a number of reasons. Recruitment did not progress at the pace anticipated, resulting in a pay bill underspend of approximately €600,000. The 2017 pay bill estimate was based on a headcount of 329 staff and, by comparison, the average number of staff during 2017 was 307. At the end of 2017, staff numbers stood at 310. Some €2.8 million of underspend occurred on non-pay administration expenses, €2.2 million of which was due to capital projects not proceeding during the year. There was also an underspend of approximately €3.6 million on programme related costs arising from lower legal and consultancy costs of €3 million during the year, mainly in regard to the shareholding and financial advisory division of the Department, savings of €500,000 in regard to the disabled drivers fuel grant scheme, given a total of 13,321 claimants received an average grant of €704 in 2017, and some €93,000 that was returned to the Exchequer relating to the disabled drivers medical board of appeal. We remain committed to seeking to minimise costs where possible, subject to achieving the best outturn for the State.

In terms of the Exchequer financial outturn, I draw the committee’s attention to the following key points. Tax revenues for 2017, at €50.7 billion, were up €2.9 billion, or 6%, year on year and €100 million, or 0.2%, above profile. In regard to income tax, which is the largest tax head, the performance in 2017 was solid, with receipts finishing the year 1.2%, or €236 million, below profile. However, this represents an annual increase of 4.4%, or €840 million. Corporation tax receipts in 2017 of €8.2 billion were €500 million, or 6.3%, above the budget forecast for that year. VAT returns saw a strong 7.1% annual increase in 2017 and were broadly in line with profile in that they were under by 0.5%, or €72 million. Total VAT collected during 2017 was €13.3 billion. The major consumption tax heading, excises, was just below profile by 1%, or €60 million, and €5.9 billion was collected. This represented a 3.7%, or €214 million, year-on-year increase. On the expenditure side, total expenditure, at a gross €58.5 billion, was €29 million above profile.

As the committee is aware, the Irish Fiscal Advisory Council was established under the Fiscal Responsibility Act 2012 to provide independent assessments of the Government’s budgetary plans and projections and to inform public discussion of economic and fiscal matters. A joint memorandum of understanding exists between the council and the Department underpinning the endorsement process of the macroeconomic forecasts prepared by the Department upon which the budget and stability programme updates are based. The council is funded from the Central Fund of the Exchequer. The funding ceiling for 2017 was €800,000.

The Comptroller and Auditor General’s special report presents an overview of the transactions, contributions, receipts and financial corrections relating to Ireland’s transactions with the EU during 2017. I welcome this report, which makes an important contribution to helping to improve understanding of how the EU budget works. My Department has engaged with the Office of the Comptroller and Auditor General on an ongoing basis over the past year or so on various issues related to the report, including the single recommendation that there should be annual reporting on a consolidated basis of all contributions and receipts from the EU. As stated in the correspondence over that time, I remain open to having a further discussion with the Comptroller and Auditor General on this issue and, in that regard, I have started an internal scoping exercise on how we might make progress towards greater consolidation. In due course, should we decide to report on a consolidated basis, all relevant Departments would need to be involved to assess fully the implications of the preparation of such a report.

I turn now to some departmental performance outputs in recent years. The Department completed its Statement of Strategy 2017-2020 and we continue to work towards achieving two broad goals: 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. The successful initial public offering, IPO, of AIB in June 2017 was the second biggest in the world at the time and raised €3.4 billion for the taxpayer. This has created a strong platform for the State to recover all of the money it has invested in AIB over time. In December 2017, Ireland repaid its remaining programme related loans to the IMF, together with the bilateral loans from Sweden and Denmark, early and in full. The Department published an action plan in 2017 under the Government’s strategy for international financial services. In 2017, 2,000 jobs were created under the strategy.

Climate change has been identified by the Department as a risk to the sustainability of the public finances and the health of the wider economy. In this regard, the Department supported the NTMA’s launch of Ireland’s first sovereign green bond on 10 October 2018. A rainy day fund has been established to protect against severe economic shocks. It will be seeded with an initial €1.5 billion contribution from the Ireland Strategic Investment Fund. The Government announced it is setting aside some of the historically high levels of corporation tax, with a contribution of €500 million per annum being provided for this year.

Since 2015, modest and sustainable annual increases in expenditure have been implemented. This approach, underpinned by growing and broad-based tax revenues, is targeted at delivering ongoing, sustainable improvements in public services and infrastructure. I am encouraged by the robust pace of the recovery in the economy, with GDP increasing by 6.7% last year. The increase in economic activity is broadly based and economic fundamentals are strong. Ireland remains one of the fastest growing economies in the EU and the recovery in the economy is seen most clearly in the labour market. Strong employment gains have driven a substantial turnaround in unemployment, which has fallen from a peak of over 16% in 2012 to a rate of 4.6% in the last quarter.

The prudent economic and fiscal policies implemented over recent years have placed Ireland in a stronger position, most notably through the improvement in competitiveness and growth in employment. As a result, Ireland continues to maintain its A grade rating with each of the three major credit rating agencies. However, we are now at or about what is termed full employment, and the economy is likely to be at, or close to, capacity. With uncertainty in the global economic and trade environment and the reality of Brexit, we face a different set of challenges in managing economic and fiscal policy in the coming years. The UK’s exit from the European Union will impose significant costs on the Irish economy. The question of how costly depends on the exact form that exit takes, whether orderly or disorderly. While the ratification of the withdrawal agreement remains the Government’s preferred outcome, it is not possible to assign an exact probability to the different forms of UK exit at present. In recognition of this, the broad strategy has been to assume an orderly exit, but simultaneously to plan for a disorderly exit. Brexit issues are mainstreamed into the Department’s work in all areas, including economic analysis, financial services and taxation.

Before concluding, I take this opportunity to express my appreciation to the staff at the Department for their ongoing work. It is only through their continuing commitment and dedication that we can deliver on our objectives. I thank the Chairman and committee for their attention and welcome any follow-up questions.

Thank you. I call Deputy Burke.

I welcome the witnesses and thank the Secretary General and the Department officials for all the work they do in presiding over the Department of Finance. I want to touch on several topics. First, in regard to the state aid recovery case in connection with Apple, is it correct that the €14.3 billion is now in the escrow account?

Mr. Derek Moran

Yes.

Have we an estimated timeline for how long we are going to have to wait for a judgment?

At what pace is the process moving?

Mr. Derek Moran

This could take many years. We had an expectation of having a preliminary hearing this side of the summer but that has not happened. It is likely to go back. In my experience, by the time this gets through the full process of litigation, up to and including the European Court of Justice, it will probably be several years.

Could it be a decade?

Mr. Derek Moran

I certainly know of one state aid case that has taken significantly more than a decade.

How does this case compare with other state aid cases in terms of scale and magnitude?

Mr. Derek Moran

In terms of scale and magnitude, there is nothing quite like this. I do not think there has ever been a state aid case across Europe where €14.3 billion has been recovered. This is one of the reasons that use of an escrow and having that negotiated between the State and the company and approved by the Commission became so important. If one simply placed €14.3 billion on deposit at negative interest rates rather than put it into a fund that will be managed by agreement across the parties, the State would be looking at very large cashflow losses in the short term. This is an exceptional amount. I do not think there has ever been anything of this level. The reason that we use an escrow is that the money goes in, it is managed against an investment and whatever is left, whether there is an increase or a decrease, settles the full amount, rather than put all the risk on the taxpayer.

This case is colossal in scale and Mr. Moran is saying it could last for more than a decade. Does he have any idea how much has been expended on legal costs by the State to date? Obviously, Apple is also contesting the case.

Mr. Derek Moran

Expenditure to date has run to about €7.1 million, of which €3.7 million relates to the establishment of the escrow and everything that goes with it. I would contrast that with the potential cashflow loss from a negative interest rate in a year, which could have been as much as €60 million. Those are the costs associated with it.

It is about capital maintenance. Do we have any idea how much legal costs could run to or do we have a projected outlay should this case continue to be delayed?

Mr. Derek Moran

If it continues to be delayed, the legal costs will be thrown up by the hearings and the issues that give rise to that, such as appeals and whatever else goes with it. At this stage, we do not have a fixed projection of that.

The legal costs will be substantial if they have already reached €7.1 million without a court hearing.

Mr. Derek Moran

The legal costs are about €3.4 million to date,

That is excluding the escrow.

Mr. Derek Moran

That excludes the escrow. The Department has met approximately €2.5 million of that and the remainder falls on the Office of the Chief State Solicitor, CSSO, and bodies like that. It has the potential to be significantly more than that.

Will Mr. Moran explain the breakdown of costs? He mentioned the CSSO.

Mr. Derek Moran

I can give the Deputy the detail. These costs run from 2014 onwards. In terms of the Department's spend, we have spent about €2.3 million on legal services, €90,000 on translations because the documentation can be in French, and other expenditure of about €65,000. The predominant cost in the €2.5 million figure is legal services. The CSSO and Revenue have probably incurred expenses as well.

To Mr. Moran's knowledge, for how long did the longest state aid case run?

Mr. Derek Moran

It is still running but it may well come to a close shortly. It has been running since the mid-1990s.

This case is dominating public discourse. It is incredible to think it will conclude so far away in the distance.

Mr. Derek Moran

This case will take a number of years. I do not think it will take that long. The other case is just one that I am aware of.

It is a complex issue that is being debated.

Mr. Derek Moran

It is a complex issue which will take several years.

The repercussions of the result will be very substantial too in terms of the tax code and what it means for the Revenue Commissioners in making determinations. It is far-reaching.

Mr. Derek Moran

That is right.

I will touch on a few other issues. I understand the independent Irish Fiscal Advisory Council, IFAC, made 25 recommendations in a report published in 2015. Three recommendations were outside the control of IFAC and it was decided that two recommendations would not be acted upon. What were the recommendations that were not implemented?

Mr. Derek Moran

I will ask Mr. McCarthy to respond.

Mr. John McCarthy

Does Deputy Burke have the actual recommendations?

I do not have them in front of me.

Mr. John McCarthy

Let me try to track that down. The Irish Fiscal Advisory Council does a report twice a year. It makes recommendations but they are mostly in the policy space so it would be more for Government rather than officials. There are some recommendations that it makes, for instance, to improve the macroeconomic forecasts or to do this, that and the other, most of which would have been implemented. I will try to track down which two have not been implemented and come back to the Deputy.

Mr. Derek Moran

We almost do an annual update of the memorandum of understanding between IFAC and the Department. That is a very smooth process. We do everything we can to facilitate its work in terms of making information available.

Has the rainy day fund been set up and is the €1.5 billion deposit already in it?

Mr. Gary Tobin

The legislation to establish the rainy day fund was before the Dáil and Report Stage was completed earlier this week. My understanding is that the Bill will have to go to the Seanad.

Mr. Derek Moran

Procedurally, I know the Ireland Strategic Investment Fund, ISIF, has set the money aside for the fund. ISIF is managing that money separately.

We have €500 million from corporation tax that has been set aside as well.

Mr. Derek Moran

Yes, there is corporation tax to take off the top.

Issues were raised about deploying the rainy day fund in a countercyclical manner if the economy meets a shock. Questions have been raised about the flexibility of the fund with regard to drawing down funds in light of domestic and EU rules on spending. Is this significant level of concern justifiable in terms of how we can spend that money should the economy experience a shock?

Mr. Derek Moran

In accounting terms, the money going in does not count as an expenditure when it is going in because basically what one is doing is transferring the money from one account to another.

The issue arises when the money is coming out.

Mr. Derek Moran

When it comes out it becomes a charge. We saw that when we took the money out of the National Pensions Reserve Fund during the crisis and we had that effect. It does not make having that cash where one may be marginalised in terms of access to the markets a bad thing to do. The recent IMF Article IV report suggested that in the context of a disorderly Brexit, rather than making deposits, we should be considering using the resource to support the economy where it is most needed. At the end of the day, when one is facing a crisis the idea that one spends money is not something that-----

Strictly-speaking, under current fiscal rules, we would be limited in terms of how we would be able to use that money. Is that correct?

Mr. John McCarthy

The Deputy is absolutely right. Under the fiscal rules, one is only allowed to do so much in order to ensure fiscal sustainability but the Stability and Growth Pact - the fiscal rules - does apply for what is called an escape clause. In other words, if one hits force majeure events, that is, events that are beyond the-----

That would be a very significant crisis.

Mr. John McCarthy

It is not really. If one looks at some of the issues-----

Force majeure indicates that it would be a very difficult situation.

Mr. John McCarthy

There have been circumstances already within the rules in which countries such as Italy have taken advantage of these exceptional circumstances that have allowed them to spend beyond the limits set under the Stability and Growth Pact. If, for instance, we had a shock to the economy, we would be allowed to deviate from the adjustment path or medium-term budgetary objective, MTO, on the basis of a severe shock. There is absolutely no question about that and the Commission is on board on that.

Doe we have that assurance from the Commission in writing? The independent Irish Fiscal Advisory Council, IFAC, raises this matter as a significant concern in one of its papers.

Mr. John McCarthy

A country would need to demonstrate to the Commission that it is a severe shock to its economy. That is open to definition. GDP in Ireland is volatile. We have been exposed to shocks in the quite recent past.

Both positive and negative.

Mr. John McCarthy

Indeed. We have spoken to them. I do not think there would be a problem. It is set out in legislation that there is an escape clause for unusual events beyond the control of member states.

It is just not simple either. Obviously, there is a demonstration to be done-----

Mr. John McCarthy

Absolutely.

-----regarding the ability to spend the moneys that will be generated.

Mr. John McCarthy

There would be a discussion at official level between ourselves and our interlocutors in the European Commission, and at political level between the Minister and his colleagues at the Economic and Financial Affairs Council. If a country can demonstrate that its economy is subject to a shock, it will be allowed to deviate from the adjustment path to smooth the shock.

Mr. Gary Tobin

The legislation that is going through the Houses at the moment provides for an in-year contingency reserve of €500 million for the kinds of force majeure issues that Mr. McCarthy mentioned. If that €500 million is not used, the legislation proposes that it should then go into the rainy day fund. That is how it is proposed that it will work.

I would like to touch on the concerns that were highlighted by the Irish Fiscal Advisory Council regarding expenditure in the State at present. It has been suggested that we are reliant on the significant revenues from corporation tax, which have been increasing over recent years. It seems that we are particularly reliant on the moneys generated by the top ten corporates. I note that the chairperson of the Revenue Commissioners stated in an article that a number of companies move in and out of the top ten contributors to our corporate tax take. He argued that this provides some level of security. I would like to refer to the overruns in the Department of Health, our exposure to Brexit, our current expenditure path and our current growth rate. Mr. Moran used a dangerous term in his opening statement when he said that "economic fundamentals are strong". Many people have perished on that previously.

Mr. Derek Moran

I qualified it with a strong "however" in the following paragraph.

That needs to be significant. I ask Mr. Moran to touch on the points I have made.

Mr. Derek Moran

After I sent over the speech, I wondered whether I should have left in those few words. The Department has been told that there have been concerns about our concentration on corporation tax for several years. We have not been behind the door about that. The historic long-run average contribution of corporation tax to our overall tax take has been approximately 14%, but it is now up around 19%. This has to be a cause of prudence and concern. We have to watch it. Some of the consequences of the global tax reform that has been happening have made Ireland a more attractive proposition for multinationals. We have seen a strong performance from the global economy, which is continuing to grow. Profitability has improved. Other changes have also been going on. That is why taking €500 million out of that continued high performance and putting it into the rainy day fund is not a bad thing to do. The last thing we want is for a big line of funding to disappear when we hit slightly bumpy waters. We do not want to be totally reliant on it.

Concerns have been raised about some increases within our expenditure growth of €4.5 billion. Does Mr. Moran think this growth is sustainable, given the uncertainties associated with Brexit and our increased level of corporation tax? I appreciate that some money is being put aside.

Mr. Derek Moran

One can look at the expenditure numbers for any given year and say they are going in the wrong direction. The numbers have to be taken over a four-year or five-year period. There has been an average current expenditure increase of between 3% and 3.5%. It has probably been slightly less in real terms. That is below our trend growth rate, which is between 3% and 3.5% with inflation sitting on top of that. We need to look at this in the round over a period of time. It is absolutely the case that the last thing we want to do is see a situation in which this starts to spin out of control. We have to be prudent about the taxes that are there. They are not there simply to be spent, because they are vulnerable. We need taxes we can rely on. There was a time when domestic companies were in the top ten corporate taxpayers, but that is no longer the case. They are all multinationals. The top ten varies over time as new companies come in and as people use up capital allowances or losses that they might have had in the past. The concentration of more than 40% of the corporation tax take across ten companies is not unusual from an international perspective. While it is not unusual to have a high concentration across big companies, it is something we have to watch.

When Mr. Moran looks at the increases in our expenditure level over a number of years, is he happy that it is reasonable? The council raised concerns about the increase in budget 2019, in particular.

Mr. Derek Moran

Yes.

Obviously, the council did not have any major issue with the tax element of the budget. Is Mr. Moran concerned about that?

Mr. Derek Moran

I will explain what concerns me. A couple of things arise as we head into 2020. The prospect of a disorderly Brexit is one of those concerns. There are simple costs associated with what Mr. McCarthy would refer to technically as the operation of the automatic stabilisers. Unemployment would go up and tax receipts would fall as a result of a disorderly Brexit. The cost could run to a couple of billion euro. We need to have an eye on that.

Mr. Derek Moran

----

Has the Department estimated the cost of the worst-case scenario?

Mr. Derek Moran

We have various estimates. In March, the ESRI and the Department published a revised assessment of the impact of a disorderly Brexit.

Mr. John McCarthy

It was earlier this year.

Mr. Derek Moran

It is estimated that over the first two years, we would see a deterioration in terms of the deficit of approximately 0.4% of GDP.

What is the position in terms of growth?

Mr. John McCarthy

I can get the figure. We have estimated that over the medium term, a disorderly exit would take approximately five percentage points off the level of GDP. After that decade, if there was no policy response, the deficit would be one percentage point worse than otherwise would be the case. For regular people, this means the unemployment rate would be two percentage points higher than in our baseline scenario. It would have an impact on growth, the public finances and the labour market, which is where people would feel it most.

Mr. Derek Moran

It is likely that the 0.4% deterioration associated with the automatic stabilisers - the tax take falling away and social spending going up - would be front-loaded. It would have a bigger impact in 2020 and it would ease off somewhat in 2021. We are doing these sorts of exercises at the moment to prepare for the autumn.

As it executes spending increases, is the Department happy that we are facing this backdrop?

Mr. Derek Moran

These are the choices. At the moment, it is hard to say what the probability around Brexit is going to be. In my view, we would have to be very cautious in an October budget if there was going to be a hard exit two weeks later. We would have to act accordingly. If a deal is eventually done and there is an orderly exit, another set of challenges arises. We are at or about full employment. Earnings in the economy are starting to tick up. We are starting to see capacity pressures. All of that would argue in favour of pumping less money into the economy, which involves containing expenditure increases and tax reductions. A counter-cyclical budget is very much where we should be going. I do not know whether Mr. McCarthy wants to add to or disagree with any of what I have said.

Mr. John McCarthy

I would like to make an important minor point. Approximately one third of the increase in spending referred to by the Deputy is due to-----

Mr. John McCarthy

-----capital-----

Mr. John McCarthy

Yes. Capital spending is going up by 22% or 23% this year. I think we all acknowledge that this is a positive thing, given the capacity constraints in the economy and the need to address bottlenecks. Maybe it is more growth-enhancing than other forms of spending.

It is still low enough. We would want to be careful on the current side.

Mr. John McCarthy

Absolutely. The Department would always highlight the need for current spending to grow at a rate that is sustainable and in line with the long-term trend growth rate of the economy.

How many departmental staff are currently working on the response to Brexit?

Mr. Derek Moran

We cannot really work the figure out that way. The answer is "everybody". In the case of the omnibus Bill that went through, for instance, there was a massive amount of tax content in it, so the tax division was involved, and the economic division did the analysis. Mr. Tobin and his colleagues work with the Central Bank on preparations for the financial sector. Brexit is essentially integrated into everything we do. We have a small co-ordination unit to bring it all together, but the entire Department is involved in the work.

In terms of banking, what percentages does the State retain in the main banks?

Mr. Derek Moran

We have approximately 70% of Allied Irish Banks, 14.9% of Bank of Ireland and 75% of Permanent TSB.

Do we have a value for what that stake reflects?

Mr. Derek Moran

I do not have information on current values.

Mr. John McCarthy

There was an evaluation done by the Ireland Strategic Investment Fund, ISIF, but it is a little dated and I have not seen the more up-to-date one. At the time of that evaluation, it was something of the order of €8 billion. This figure might be a year or two out of date but things probably have not changed that much since.

Will Mr. McCarthy clarify what is referred to in respect of that €8 billion?

Mr. John McCarthy

It is the valuation of our banking assets.

It is the value of what the State currently holds?

Mr. John McCarthy

Exactly.

Mr. Derek Moran

I have a figure here of approximately €8.6 billion.

Mr. Seamus McCarthy

The figures in the ISIF financial statements, which have been signed off and are due for publication relatively soon, will give the up-to-date position. It is certainly of the order of the figure the witnesses indicated.

Will that figure give the position at the end of December 2018?

Mr. Seamus McCarthy

Yes.

I wish to explore two further points. We have heard about the mortgage tracker scandal and other issues in terms of how the banking sector has behaved. Given that the State is still a key investor in the sector, will the witnesses explain the safeguards the Department employs in terms of its decision making? I am talking about, for example, potentially recommending a discontinuation of loss relief in respect of corporation tax for the banking sector. That represents a huge asset for taxation on the balance sheet and, in theory, makes our banking system more valuable for investment. Given its status as key investor, for the State to get its money back out of the banking sector, it is in its interest that the banking sector be as valuable as it can be.

My second question relates to non-performing loans, NPLs, and the power of the Minister vis-à-vis the Department in a situation where, say, the CEO from one of the main banks argues that the bank is under pressure from the Single Supervisory Mechanism, SSM, to reduce its non-performing loans. Where a lot of people are caught up in these NPLs and some of them have split mortgages, one bank may have a totally different interpretation from another bank as to what a non-performing loan is. As a member of the finance committee, I saw on several occasions that witnesses from the main banks differed in their adjudication of what constituted a non-performing loan where people had signed agreements and got their mortgage split etc. I am a little confused as to how the State manages the decision-making process in terms of safeguarding those competing interests.

Mr. Derek Moran

We have a shareholder financial advisory division whose job is to manage the shareholding. We keep the banking policy entirely separate because, as the Deputy observes, one cannot have a shareholder who is looking to maximise value while at the same time making or influencing banking policy, deciding how one might look after consumers or any of those issues. Deputy Burke is absolutely right on this point. We have to manage that within the Department because we hold both the shares and the responsibility for the banking aspect. At the end of the day, we have a responsibility to the taxpayer to try to get back the money we put into those banks, but we should not do so at the cost of the consumer.

I am asking specifically about what safeguards are in place where the Department is making key taxation decisions that would, in theory, generate more revenue to go back to taxpayers in the context of situations where a homeowner is about to have his or her mortgage sold and the CEO is saying that needs to be done for the bank's interests and value, but the homeowner is making the case that it is a very marginal call given that another bank would declare the mortgage as performing because a deal was done or the mortgage was split. How does the Department, representing the State as a key investor and shareholder, evaluate that and ensure it is holding the bank to account on that line?

Mr. Derek Moran

I will deal first with the Deputy's question about tax and the disallowance of loss relief. The problem is that to take loss relief from one sector and make it available to everybody would not be sustainable in policy terms. It is less to do with pressure from the banks to retain their loss relief. What we have done is impose a bank levy of €150 million to get something back by way of a contribution, and that is ongoing.

Mr. Gary Tobin

As the Secretary General highlighted, we have deliberately split responsibility within the Department between the shareholder division and the banking policy division. There is a Chinese wall between the two, for all the reasons Mr. Moran gave. The banks operate on a commercial basis and their individual independence is protected by the relationship frameworks, which are legally binding documents. The Department does not interfere in the commercial decision making of the individual banks.

In terms of the tracker mortgage investigation, it is probably the most complex investigation the Central Bank has ever undertaken. There has been €665 million of redress given out to customers to date. Our focus is to try to ensure that what happened with tracker mortgages does not happen again. One of the key ways in which the Minister and the Government are proposing to do that is through the Central Bank (amendment) Bill, which is being brought forward. The legislation will have three key elements, one of which is the introduction of a senior executive accountability regime, SEAR, for senior managers in the banks that will allow us to pinpoint who is responsible for what function in advance in individual banks. It can be argued that through the crisis, it was not clear exactly who was responsible for which particular part of the disastrous decision that led to X, Y or Z. The SEAR is designed to overcome that. There will also be new conduct standards for all financial services firms and enhancements to the fitness and probity regime and the enforcement regime. There will, as a result, be a greater number of rules in place, which will, we hope, ensure that some of the activities we saw through the crisis, including in respect of tracker mortgages, will not happen again.

If a commercial bank decides to sell a portfolio of loans, does it advise the Department of that decision?

Mr. Gary Tobin

Those are commercial decisions by the bank.

That is not the question I asked.

Mr. Gary Tobin

No, but I am trying to emphasise that point.

Yes, Mr. Tobin explained the detail of that.

Mr. Gary Tobin

The Department is regularly updated in terms of board packs, the shareholdings we have and what the banks' plans are. However, these are commercial decisions taken by the banks.

Does the bank advise the Department if it is going to sell a particular loan portfolio? Take, for argument's sake, Permanent TSB's Project Glas. Would the CEO or whoever advise the Department's banking section that the bank is about to sell it?

Mr. Gary Tobin

These issues would come up in the context of regular board meetings of the banks and the Department would see the board pack information. To that extent, it would be aware of the particular plans. Again, ultimately these are commercial decisions.

Mr. Derek Moran

The banks are required to inform the Minister but the Minister does not have the right to say yes or no. That is the bottom line.

Can the Minister ask questions as well?

Mr. Derek Moran

Yes.

It is something we need to be conscious of, particularly in view of the way the banks behaved and the various interpretations of what constitutes an NPL. In many instances, I have seen loans that are put up for sale comprising mortgages which are up to date and which have never been in arrears or loans on rental properties that fell behind six years ago but which are up to date now. I have seen how those loans were placed in a bundle and sold. Some of these cases were extreme and the Department needs to be aware of how issues like this affect people. Citizens of this State have to be protected too and they are being railroaded by some of these practices.

Mr. Gary Tobin

Yes. I would not disagree with anything the Deputy is saying. Sometimes what happens is that loans are connected so that one could have a principal dwelling house, PDH, loan that is connected to a commercial loan. In such circumstances, some of the issues that the Deputy mentions can arise. The definition of what constitutes an NPL is set down by the European Banking Authority. We have a European definition-----

On which there were requests for clarification on a number of occasions by our banking sector. At meetings of the finance committee, I have heard very different responses to and interpretations of what is set down.

Mr. Gary Tobin

I would just point out that the NPL ratio within the various banks has come down a lot but still remains quite high. The ratio at AIB is below 8%, at Bank of Ireland it is around 6% while at PTSB it is approximately 10%. The concern of the ECB and the SSM would be that the banks need to be ready for the next potential downturn. We cannot go into the next downturn, to which the Secretary General has alluded, with elevated levels of NPLs from the last crisis, a decade ago. That will only exacerbate what we face into the next time.

Finally, the State's investment in three banks to which Mr Tobin referred is potentially worth €8.6 billion. What is the cost of that investment? How much did we put into those entities?

Mr. Derek Moran

Just over €29 billion and we have got back just over €19 billion to date.

We put in €29 billion and have got €19 billion back. There is a further €8.6 billion potentially still available to us.

Mr. Derek Moran

Yes. We are a little bit shy, on current market valuations, of recovering the amount but that is where the judgment about when to go to market, when to sell comes-----

Mr. Gary Tobin

Obviously, the Deputy will be aware that bank stocks have underperformed over the past year across Europe in general. That is why we are a little below par at present.

Mr. Seamus McCarthy

I have a point of information relating to that. I have previously reported on the cost of banking stabilisation measures. I last reported the position as at the end of 2016 and I will be updating that for the end of 2018. Specifically, the question of the cost of the rescue of individual financial institutions will be addressed in that update.

I thank our guests.

Deputy McSharry is next.

I thank the Chairman and welcome everyone to the meeting. The first issue I want to deal with is bankers' pay and then I will move on to the liquidation of IBRC. Has the Department received any advice on bankers' pay in the context of the pay cap?

Mr. Derek Moran

We contracted Korn Ferry to conduct a review of the cap on bankers' pay and its implications at the end of last year and have received a report from it. We have consulted the Central Bank and anticipate a response from it shortly. We have seen a massive increase in the size of the financial system and there is a lot of cannibalising of staff going on across the system but in terms of financial stability, we think it is important to consult the Central Bank. I anticipate that the Minister will consider this report in the coming weeks when we get the response from the Central Bank.

When did the Department receive the report?

Mr. Derek Moran

I think it was February or March. I do not have the exact date. We contracted for it at the back end of last year.

What is the Department's view on the impact of the bankers' pay cap in light of the departure of senior people from AIB and elsewhere?

Mr. Derek Moran

We understand the reasons for a pay cap but we are seeing large chunks of the senior management at the banks in which we have shares being taken out and going elsewhere for much higher levels of pay.

Are they going to other countries?

Mr. Derek Moran

Yes, but also here in Ireland. The arrival of large financial organisations from London as part of the so-called Brexit bonus is having the effect of drawing staff off and-----

Would Mr. Moran expect a recommendation to remove the cap?

Mr. Derek Moran

The Minister has not considered-----

I know the Minister has not considered it.

Mr. Derek Moran

I think it presents a challenge.

Is that what the report states?

Mr. Derek Moran

This is why the Central Bank's input is important. It would like to see stability within the domestic banking sector and the cap is posing a threat to the stability of those banks. We will wait and see-----

I hear what Mr. Moran is saying but what the public is interested in is whether we are going to remove the cap.

Mr. Derek Moran

That would be a decision for the Government.

That would be a decision for the Government. I wonder if it will be making that decision soon.

Mr. Gary Tobin

The focus tends to be on the senior C-Suite officials but there are approximately 23,000 people working in the banks.

Yes, but in real terms, we are not talking about IBOA members here. I would not say there is a big section in the report that the Department commissioned on them.

Mr. Gary Tobin

I do think there is an issue about whether-----

We are talking about the guys on millions and what the taxpayer is interested in is whether we are on the cusp of removing the cap and heading back to the same old, same old, with chief executives on €6 million and €8 million per year.

Mr. Gary Tobin

I think there is an issue about rewarding people lower down in the organisations.

To be honest, I totally agree. We should reward the people lower down but that has nothing to do with the pay cap. I do not know what the average bank official earns now but when I was an ordinary bank official, it was not very much and it certainly would not pay for the printing of the aforementioned report, not to mention the-----

Mr. Gary Tobin

Yes, but it can impact on their ability to earn a bonus.

Of course, but we are not talking about modest bonuses here. We are talking about the pay cap at the upper end. At the banking inquiry we had guys in who had salaries and bonuses worth €6 million and €7 million per year. The public is interested to know if we are heading down that route. In terms of the timeline, I know that our guests cannot say anything definite because it is a matter for the Government. Has the report been given to the Government? Has it been sent to the Minister for a decision?

Mr. Derek Moran

My understanding is that the outgoing Governor of the Central Bank, who leaves in the coming days, will respond this week to the report. The next stage-----

The report is complete but Mr. Moran is not in a position to say whether it recommends the removal of the cap.

Mr. Derek Moran

This becomes a policy consideration for the Minister and the Government and-----

I appreciate that-----

Mr. Derek Moran

No, I am not in a position to say-----

Mr. Moran is not in a position to say but the report could say that. We are waiting for the outgoing Governor of the Central Bank to give a view and that is imminent. Once the Minister gets that view, he will be in a position to make a decision.

Mr. Derek Moran

Yes.

We can put that to him on the Order of Business in the House next week. That is fine. That is that issue dealt with so I will move on the IBRC and the liquidation of same. Are the relevant people here to discuss this?

Mr. Derek Moran

We will try.

A question that was on my mind, which I probably should have asked the last time we visited this issue, relates to the drawing up of the terms of reference for the liquidation. Did KPMG advise on that process?

Mr. Derek Moran

I do not know. We would need to ask the right people. I do not know the answer to that but I can find out for the Deputy.

I am anxious to know because KPMG is the liquidator.

Mr. Derek Moran

Yes.

Given what we saw lately with the national children's hospital and other such matters, I am interested in it. Obviously, it was new ground, there was a big liquidation being drawn up - the biggest in history, and I very much hope to hear back from Mr. Moran that KPMG was not consulted and did not advise on the formulation of the terms of reference. If the answer is other than that, we potentially have problems. This committee recommended the establishment of a committee of inspection for the liquidation. Why did the Department not embrace that recommendation?

Mr. Derek Moran

It is a special liquidation.

Mr. Derek Moran

The law specifies that there is not a committee.

The law did not specify there is not a committee, the Act took out what is in the Companies Act 1963 to ensure that there would be a committee.

Mr. Derek Moran

I think we have been through this before. I do not have the people to deal with the detail of this matter.

We have been through it before but we got no answers and we have this charade going on down in the High Court where on the one hand we are not allowed to have the answers because the matter is sub judice. This committee has offered to try to see if we can help. The Chief State Solicitor's office, without checking with us, put it into a letter of correspondence to the applicant in the case to ask if the applicant would pull back if it let the Committee of Public Accounts do a bit of work. All we want to do is save a little bit of money, get the appropriate oversight and, meanwhile, we have a case going on in the High Court where nobody is engaging with anybody. We are heading for €306 million in taxpayers' money for this liquidation. I have a report in front of me today that was commissioned by a third party where Professor Constantin Gurdgiev effectively said that as a consequence of the failure to properly account, analyse, assess, challenge or monitor, or both, the costs of the interests of the Irish taxpayer and ultimately all creditors of IBRC have not been or are not being adequately protected. That happens to be my uneducated, ordinary five-eight view, as articulated at this committee many times over the past two years, but he comes with a bit of credibility. When we were last here we did have the relevant person, a former employee of KPMG apparently - not that that is an issue - and he was able to tell us that about two people were dedicated to this.

The other issue is that we are not even going to be able to adjudge at the very end, whenever the end is, on the performance, because part of the terms of reference, when one puts it all together, there was no valuation of the assets or expected recoverable value of the assets held at the time of liquidation, so that established no benchmark or key performance indicators for liquidation process performance. We are all just going to arrive at the end and say we did a tremendous job, which we know cost €306 million, because we will have nothing to compare it with and we will have added no oversight other than the glorified PowerPoint presentation that is rolled out, the most recent one being on 22 May, with headline issues, but it is not remotely the sort of detail that was available to me when I was voluntarily liquidating my own very modest business. I did not have any creditors because I paid all the bills. It is totally unacceptable.

Mr. Derek Moran

I think it is two years ago that we were prepared to engage, but the fact is there are two sets of litigants before the courts on these exact issues and that leaves us in this position. Part of the reason I have not brought some of the experts with me is precisely because Mr. Hall's case and the other one, which I cannot remember, are before the courts.

What is the other case? Is there another case?

Mr. Derek Moran

Yes, there is a second one.

Mr. Derek Moran

I will check that for the Deputy. I will get the name. There is a second case.

Is the statement of claim broadly the same?

Mr. Derek Moran

Yes, it is very similar.

What is the issue? Why does the State not give the level of oversight that the Committee of Public Accounts is looking for on the one hand and these two parties on the other, whosoever they are? What is the issue? Who in the Department of Finance is advising that someone would get on to the State Claims Agency or the Chief State Solicitor's office and say we are not doing that? Why are we not doing that? What do we have to hide?

Mr. Gary Tobin

My understanding is that the Attorney General has given us the advice that, as these matters are now before the High Court, they are sub judice.

Yes, but that is the standard cop-out. If there was a genuine case, I could see why that would happen. How much have we spent on defending the cases so far?

Mr. Derek Moran

We can get a figure for the Deputy.

We have three things to get back: if KPMG advised and what were the terms of reference dates. We want to know, before KPMG was appointed as liquidator, what contact, if any, there was with KPMG on the terms of reference or any other such matter.

Second, how much have we spent on these cases that are totally unnecessary down in the courts?

Mr. Derek Moran

We did not take the cases.

Yes, but why did the Department mount a defence? Why did the Department not follow this committee's advice before there was ever a case and set up a committee of inspection?

Mr. Gary Tobin

I do not think we can ignore legal proceedings that have been initiated in the High Court by two citizens.

The Department got the Chief State Solicitor's office to write to the applicants to ask them to pull back if it got the Committee of Public Accounts to do this, that and the other. Do the witnesses not remember that? Did the Chief State Solicitor's office act unilaterally on that matter?

Mr. Derek Moran

My recollection is that it arose out of our discussions here.

Mr. Derek Moran

To get the Chief State Solicitor's office to see if they would pull back from the proceedings.

Mr. Derek Moran

Which it did.

What happened then?

Mr. Derek Moran

The proceedings are still-----

They sent the Department a proposal along those lines. Did they not?

Mr. Derek Moran

Who did?

One of the applicants.

Mr. Derek Moran

Not to the best of my knowledge. There are two proceedings. I will come back to the Deputy on who is involved in the second proceedings.

We are unnecessarily wasting the people's money. The big money is the €306 million. With the appropriate oversight, perhaps a committee of inspection would come out with a detailed report saying KPMG did the best possible job that could be done. I always qualify my remarks about this matter by saying that, but perhaps it would not. In any event, the people are entitled to it. As things stand, I am not even sure there is anyone in the Department of Finance who has the level of detail available to him or her that an ordinary creditor or stakeholder would have, because KPMG pays itself from recoveries. The rates of pay are the NAMA rates but I am not looking at the time sheets. I do not know how many seniors, juniors or partners were involved. I often heard it said that in accountancy firms, if a particular job is done people are told to put down this time for one liquidation and that time on another liquidation. That is what committees of inspection are for, namely, to question and challenge those things and the need for stakeholders to be involved. We do not have that. The witnesses cannot in all fairness tell me that they are 100% confident we are getting value for money because they cannot possibly know that.

Mr. Derek Moran

We are going around in circles.

Yes, we are going around in circles. Mr. Moran is the man in charge.

Mr. Derek Moran

I acknowledge that.

Mr. Moran is in charge and I am asking him why we did not set up a committee of inspection. Why was that advice given to the Minister of the day? Why do we not have one now? This committee recommended it two years ago. There are two court cases looking for the same thing. Mr. Moran is correct; here we are again. Every time Mr. Moran is in here between now and 2022, if it is over in 2022 – if it is a case similar to PMPA it will not be over for another 20 years – but let us say it is over in 2022, this will be on the agenda of every Committee of Public Accounts meeting Mr. Moran attends. We had two people. How many staff in the Department are associated with it now? There were two. Did we increase that?

Mr. Derek Moran

It is a similar level of staff.

Yes, two. That should give people great confidence to know that there are two people keeping an eye on their €306 million. Does Mr. Moran agree with anything I say?

Mr. Derek Moran

We are operating within the law-----

Mr. Derek Moran

-----on the basis of the Act.

Mr. Derek Moran

That did not include a committee of inspection, and we are operating within that.

Mr. Derek Moran

There are proceedings now before the court around all of those issues and we cannot comment on that.

There is nothing to stop Mr. Moran. When his colleague was before us, I think his words were that he had a great story to tell, but he just could not tell the committee. The Department could put it into its response before the courts but it will not tell us. We are only interested in the people's money here. We are only interested in providing value for money. Whose decision is it to stop defending a case?

Mr. Derek Moran

Sorry?

Is the Department of Finance a party to the case?

Mr. Derek Moran

It is the Minister and the Attorney General.

The Department of Finance.

Mr. Derek Moran

The Department of Finance would be involved, yes.

Whose call is it?

Mr. Derek Moran

Can I come back to the Deputy on this? We did not stay this litigation. We came in here in December - or whenever it was - to a hearing, prepared to go through this. We had the liquidators here as well but the litigation was starting, and then a second set of litigants-----

We had correspondence telling the liquidators not to come between the Department, if Mr. Moran recalls. It was something we were unhappy about, if Mr. Moran recalls that meeting.

The legal proceedings were initiated before that meeting.

Mr. Derek Moran

Just before that meeting, yes. That put us in an impossible position.

It was the previous Friday. Why does somebody not discontinue the case or go to somebody to mediate and say, "Let us do a deal here"? These people are not looking for compensation or money, to the best of my knowledge. I have read the statement of claim for one of them. I was not aware of the others. Nobody I am aware of is looking to make money here. They are looking for the same thing we are looking for - oversight. Obviously, I can understand that the State cannot be a soft touch. If somebody was looking to take action against the State for financial gain, of course, that is a matter for the courts to decide and we must issue a defence. However, what we are fighting here is two people privately looking for the same thing that the Committee of Public Accounts is looking for, which is, oversight and transparency on the most expensive liquidation in the history State, at €306 million. To date, €150 million has been paid in fees - for example, €144.9 million to KPMG up to December 2018, €35.8 million to A and L Goodbody, and €20.2 million to Linklaters. Maybe everything has been done right, but we would like to know. We will not until it is all over. I am concerned that the people are not getting value for money. I am also concerned that two or three staff in the Department is not sufficient.

Is the Department operating within the special legislation?

Mr. Derek Moran

We are operating within the legislation.

It is not normal, company law.

Mr. Derek Moran

It is not company law. It specifically left out the committee of inspection.

Mr. Derek Moran

It left out the committee of inspection that is provided for in company law.

Who did that? Was it the Oireachtas?

Mr. Derek Moran

The Oireachtas, yes, at the end of the day.

It was in the middle of the night.

Mr. Derek Moran

Sorry, a lot of things were done at that time in the middle of the night.

It was 5 a.m. when that was done. We saw the Bill at 10 p.m. and all Stages were concluded by 5 o'clock the following morning. That is the scrutiny it got.

Am I out of time?

No. I would like to make one observation on that. It was rushed legislation and it does not provide for this. It is the law, but maybe it is something we or someone else in the Oireachtas will have to discuss.

I agree, but this is not new. None of us, the Chairman included, is bound to support or repeat the mistakes of the past, but it is reasonable that we would learn from them. I cannot imagine the Minister, Deputy Donohoe, saying to the Secretary General that he notes he has a proposal here for a committee of inspection, that he is sorry he is not agreeing to it and that the legislation was passed in the middle of the night in February 2013 or whenever. The Minister would take the Secretary General's arm off and say that it is a great amendment Bill, that they should do that and let the committee of inspection in there and give the people the oversight they require, and that he amendment would also put to bed two court cases where other third parties are looking to achieve effectively the same as the Committee of Public Accounts. Would Mr. Moran not recommend that to the Minister?

Probably what is being looked at here is that the legislation does not provide for a committee of inspection. The special liquidation passed by the Oireachtas was a major issue. The Department of Finance effectively stated that it would adopt a hands-on approach with this legislation and appoint a special liquidator, the Minister appointed him on 7 February 2013 and he commenced work a minute later. That is fine. However, the public probably would have expected that the level of scrutiny that a committee of inspection would provide in a normal liquidation would be provided by Department of Finance given that the Department did not prescribe a committee of inspection in the legislation. It appears that the two staff members who are overseeing this would not equate to a normal committee of inspection.

A committee of inspection for a company with a turnover of €100,000-----

I would have stated on the previous occasion that I was shocked to hear how few were on the case now. Mr. Moran told us the Department had eight or nine staff when it started, but we are down to two staff now. Given the scale of this issue, we would expect the same level of scrutiny in this case by the Department as if it was done through the Companies Act in respect of a committee of inspection in another circumstance. We do not get the impression that there is a similar level of scrutiny here. One may call it what one likes. Maybe I am wrong, but it is just the feeling I am picking up. Does Mr. Moran get my point?

Mr. Derek Moran

I understand the point.

It is not what one calls it. The usual practice is to use the Companies Act. We are aware the Oireachtas did something different here. The Oireachtas was probably entitled to believe that, because of the special circumstance, we would have the normal level of scrutiny but we would not call it a committee of inspection. I do not feel we have that. That is my observation. It is not a conclusion from me. It is my observation at present.

Mr. Derek Moran

Deputy MacSharry referred to my colleague, Mr. Carville, who came in here to that hearing. That is when we had the team here. His point was we have a good story to tell and are happy to share that, but the cases then stopped us. The legal advice stopped us from having that discussion. We find ourselves going around in circles and it is not terribly satisfactory from anybody's point of view.

It is not. I appreciate it might be a Government decision, but can Mr. Moran go back to the Department and sort these two cases?

Mr. Derek Moran

We would be more than happy to sort these two cases.

Okay. I hope the two applicants are watching today and saying, "Let us sort these cases and give us the scrutiny that we want". Unfortunately, the glorified kind of PowerPoint presentation that comes out as the periodic report is not the kind of oversight that I am talking about.

I do not think I have anything else to raise. I thank Mr. Moran.

Mr. Moran can understand the point. He can understand the level of public frustration due to the lack of knowledge on where we are at.

Mr. Derek Moran

I would say the Department sent in a team in December, I think, two years ago to answer the question and we found ourselves-----

It was unable to do that.

Mr. Derek Moran

-----not in a position to do that.

Okay. I call Deputy Catherine Murphy.

I will continue on this theme because Mr. Moran is to come back to us with a response to some of the questions. I have a few further questions Mr. Moran might respond to as well. Who were the auditors for IBRC before it was liquidated? I am aware KPMG were the auditors of Irish Nationwide, which, obviously, makes up part of IBRC, but I cannot recall who were the auditors of IBRC.

Mr. Moran might give us some indication as well in this regard. In the report on Vote 7, the Department refers to unsecured creditors payments but it would be quite useful for the committee to see a profile of what is happening in IBRC from the time of its liquidation. It is quite difficult to get a handle on it. The lack of any kind of transparency on this is a real cause of concern. Obviously, that is why the committee of oversight is being sought.

I accept a committee of oversight is not in the legislation, which was rushed and, obviously, deficient. If, for example, it was a question of a committee of oversight being put in place, and, obviously, the legislation would have to be amended to do that, would that make the court cases moot? Would the Department agree that would be the case?

Mr. Gary Tobin

It would be up to the individuals who have taken the legal cases to decide to withdraw them in that hypothetical scenario.

There is little to argue if-----

Mr. Gary Tobin

Maybe I am not expressing it very well but what I am trying to say is that the committee would need to ask the people taking the legal cases what their motivation is for taking the legal cases.

It is the same as ours.

Yes, that has been stated. It is in one of them. I was not aware there was a second one. On that same point of the report that has been carried out into the cost of rescuing individual institutions, will the Irish Bank Resolution Corporation, IBRC, be included in that?

Mr. Seamus McCarthy

Yes, it certainly will.

I want to move onto a number of issues that we are scrutinising today and I to jump to one in particular. The Government provided €1.2 billion to Irish Water in 2017. There is the same issue here with oversight being one step removed because Irish Water was set up in the way it was. The Comptroller and Auditor General does not have a function in auditing and that is something that is under consideration. I do not know if there is any advance on where that is at?

Mr. Seamus McCarthy

No.

That is a lot of money. For the benefit of the committee the witnesses might outline the rationale for the various approaches adopted to funding Irish Water. We all know that a lot of money is required. Did Irish Water come to the Department? What is the priority that is set up? How does that work and how do we see that?

Mr. Derek Moran

I might kick off with Irish Water. I agree that when one looks at the Byzantine funding of it through various channels such as the Vote, the local government fund, equity injections and loan financing, it is a strange structure. That was recognised and water charges were abolished. This has been tidied up since 1 January 2018 and all funding going to Irish Water will go through the Vote of the Department of Housing, Planning and Local Government. That should give the clarity that the Deputy is looking for on where the money is coming from and what it is going there for. That should be seen in the 2018 accounts for the Department of Housing, Planning and Local Government.

Irish Water's commercial borrowings are to be replaced by what we call a central funds stability scheme. In other words, the National Treasury Management Agency, NTMA, will borrow on its behalf, rather than have it borrow commercially, to get that funding more cheaply.

Will that require legislation?

Mr. Derek Moran

It is happening at the moment. If we look at the Exchequer borrowing requirement for this year, there is a big spike in it and the reason is that we are borrowing State money at cheaper rates to redeem the commercial Irish Water loans so there has been a massive tidying up and a greater bringing of transparency on that over the last two years.

Do we know how much has been refinanced?

Mr. John McCarthy

It is €1.3 million or €1.8 million. I will clarify that for the Deputy in a second.

Mr. Derek Moran

There was a spike in the Exchequer borrowing requirement, EBR, of about €2 billion in 2019 and the most substantial part of it was the refinancing of Irish Water.

On oversight, do the witnesses have concerns that there is not the kind of scrutiny that would normally be afforded to a substantial amount of money?

Mr. Derek Moran

What has happened since 1 January 2018 massively increases that oversight. I do not know if the Comptroller and Auditor General would agree but there is a huge degree of greater transparency.

Can I ask if the Comptroller and Auditor General would concur with that?

Mr. Seamus McCarthy

I would prefer not to make a comment on a 2018 development. I have not examined it and until such time as I do, Mr. Moran is ahead of me.

Mr. Derek Moran

Apologies, I am slightly ahead of the Comptroller and Auditor General. I looked at that table and I found it to be an extraordinary construction.

I do not find it acceptable but that is my view.

Mr. Derek Moran

The bottom line is that it has moved on to an entirely different model.

Mr. John McCarthy

That figure was €1.8 billion. Mr. Moran mentioned a spike in Exchequer borrowing but because it is just one fund within general Government, it is completely neutral from a general Government perspective.

Yes, it has to be.

You might send the detailed note that you have there on to the committee.

Mr. John McCarthy

I am happy to do so.

I want to skip on to the Housing Finance Agency, HFA. The loans to the HFA have decreased each year between 2013 and 2017. The decrease in 2016 was €290 million. Why would that have happened? We require significant income. Is it off balance sheet? Is that where the move is? What is the reason for that?

Mr. Derek Moran

At this stage I do not have an answer for the Deputy. Can I check that for the Deputy? There is not any shortage of funding. Can I come back to the Deputy on that?

When will Mr. Moran come back to me on it?

Mr. Derek Moran

We will try to do it before the end of the hearing or we will do so in writing. In writing is probably the most efficient way of doing it.

I want to know if that impacts on the ability of the Housing Finance Agency to deliver new housing stock. That is the kind of thinking that I want a response to.

Mr. Seamus McCarthy

While I do not audit the Housing Finance Agency. Its lending is for more purposes than just for housing. It is local authority lending and matters such as the land aggregation scheme and the purchasing of sites or the taking into control of sites under land aggregation has allowed some reduction and repayment to the Housing Finance Agency. There was one transaction in 2017 where there was about €470 million. It was effectively a circular transfer of moneys out of the Exchequer which allowed a reduction in Housing Finance Agency indebtedness.

Mr. Derek Moran

I would be confident that none of this is hampering the development of housing.

Mr. Seamus McCarthy

I am not aware of anything like that.

The Department will come back to me on that.

Mr. Derek Moran

On the overall policy and objective of delivering housing, this will not prove to be material.

There is compensation and there are legal costs but there is quite a sizeable amount where there was zero compensation but there were legal costs amounting to €526,000 awarded. What did that relate to?

Mr. Derek Moran

We often have cases that go all the way to the Supreme Court and we win the case. At the end of the day the Supreme Court will take the view that the case was taken in the public interest and require us to meet the legal costs of the applicant.

Was that the case in this particular case?

Mr. Derek Moran

It was Deputy Joan Collins's case on promissory notes. The instruction comes from the court that this was taken in the public interest and we are instructed to pay the costs.

Before I go to the national debt, I want to ask about the income tax which was 1.2%, or €236 million, below profile. This year the rate of unemployment is 4.6% and it was higher than that in 2017. Does the Department have an explanation of why it is below profile? Does it understand the nature of the workforce, for example? Is that impacting on the gig economy and the likes of part-time work? Is there an analysis on that?

Mr. Derek Moran

It has been the case for as long as I can remember that for new employment the sensitivity or elasticity in terms of tax is far weaker than for an earnings increase. That arises for a range of factors. It may well be because it is at entry level and people come in during the middle of the year and have tax credits available which have not been used in the course of the year. The intensity in tax terms is much weaker. When there is an adjustment in earnings we get a much stronger elasticity. Mr. McCarthy is much better at describing elasticity for an increase in earnings, but if we see a 1% increase in employment, we will see approximately a 0.8% or 0.9% increase in tax. If we see a 1% increase in earnings, we might get a 2.1% or 2.2% increase in taxes. That has always been the way. It is not a new phenomenon.

Mr. John McCarthy

I will make one additional point. Income tax is a broad church. We have labour related income taxes - PAYE, USC and so forth - but we also have taxes on income that are not generated from employment, including DIRT, life assurance exit tax, dividend withholding tax and so forth. I cannot remember the details exactly because I tend to focus more on what is going on now, but in 2017 the shortfall on income tax was more related to those taxes rather than the labour taxes.

Mr. Gary Tobin

Certainly, the amount of tax we have collected on DIRT has fallen substantially because obviously the amount of interest people are earning is low.

Are people getting interest? Where can I go to get interest?

Does the Deputy have money on deposit? I imagine a cheap overdraft would be more in her line.

The banks nearly charge customers if they have any money to deposit nowadays.

Mr. Gary Tobin

I would recommend the post office, but Deputy Murphy should not tell anyone I said that.

I wish to discuss the debt to GDP ratio. I know we have a new calculation called GNI*. That is not how we are rated under the fiscal compact treaty and the legislation that followed it. Where are we in the table? What is our debt to GDP ratio?

Mr. Derek Moran

It is approaching 60%. I think the estimate for this year was 63% or 64%.

Given that, we have the capacity to borrow when we get to that point for capital projects. Is that the case?

Mr. John McCarthy

We already ramped up capital spending by 25% this year and by a further 11% for next year. In money terms, last year we had public debt of €206 billion. This year, the figure will be approximately €205 billion. As the Secretary General mentioned, that is a little above the 60% of GDP threshold. On a GNI* basis, which we see as the repayment capacity, the figure is 107%. Another way of looking at it is on a debt per capita basis, which works out at approximately €42,000 for every man, woman and child in the country. That is astronomical.

I am glad Mr. McCarthy said it is astronomical because we got a report earlier from the Department of Finance noting, but not concurring with, our concern about the size of our national debt. It is astronomical.

Mr. John McCarthy

That is why we have decided to publish an annual debt report, as mentioned by the Comptroller and Auditor General earlier in the meeting. We will have our third annual report on that next week. The Minister has cleared it and we are finalising it at the moment.

Mr. Derek Moran

One of the reasons we do the annual report is so that people do not forget that we have this astronomical burden hanging over us.

I want to pursue another associated line. The officials have identified climate change as a risk to the economy. When Mr. McCarthy was before the committee previously he told us that by 2021 we could face fines of in the region of €600 million annually. The Government recently indicated that the fines would be in the region of €150 million. Will Mr. McCarthy explain the difference between the figure he gave us and the figure cited by the Government?

Mr. John McCarthy

It depends on the actual emissions and how far we-----

We are going to miss our targets. We know that.

Mr. John McCarthy

Yes, but it is by a quantum. There is a great deal of uncertainty about by how much we will miss them. The actual costs matter too. Many things go into the calculations. The €150 million figure is subject to uncertainty as well. When I was before the committee previously I was trying to give an indication of what the extent might be.

Was Mr. McCarthy €450 million out?

Mr. John McCarthy

I cannot remember.

Can we get something on this?

Mr. Derek Moran

I think the estimate that the committee currently has is a better estimate. Part of the change has been the availability of carbon credits. The credits are available to offset the need to pay fines. That is my understanding of it. The figure of €150 million is a better number.

It is certainly a better number.

Mr. John McCarthy

We should remember that the cost of carbon credits has plummeted during the past year or so.

We are missing our targets and buying credits but not dealing with the underlying issues. Is that right?

Mr. John McCarthy

Yes.

This is relevant to capital spending and ensuring those fines do not accelerate. We saw that the Moneypoint power plant was part of the reason for the improvement in our emissions numbers last year. That was because there was a breakdown at the plant. Since our underlying figures on emissions are not improving, we cannot be sure that we can avoid exposure to greater fines. The way to deal with this is to invest in public transport, retrofitting of housing and so forth. Has the Department done a profile or cost-benefit analysis specifically on climate or is that simply looked at on the basis of each individual capital project?

Mr. Derek Moran

Climate policy generally is a matter for our colleagues in the relevant Department. The analysis of carbon investment is probably a matter for the Department of Public Expenditure and Reform. From the point of view of the Department of Finance, the key issue will be pricing carbon. This is the controversial and ongoing difficult issue of carbon taxation. There is broad consensus that one of the biggest contributors to reduction of emissions is by pricing carbon and putting a cost on it, but that is not simple. It is genuinely not simple. It would have distributive effects. It may affect those people on lower incomes more heavily and, therefore, we have to address those things. There is an urban-rural question in terms of the impact on farming and so on.

As recently as Monday or Tuesday this week, we put out a public consultation document at the request of the Joint Committee on Climate Action around the phasing in of carbon taxation, the hypothecation of those revenues and what might be done to support climate change efforts. Climate change is one of those issues. It is seldom that a Secretary General of the Department of Finance comes before the committee to say that hypothecating revenues towards something is a good thing. The underlying problem of the environment is one area where any revenues from a carbon tax should go towards carbon reduction.

I completely agree with Mr. Moran that it is not an easy subject but carbon taxes are not the only approach.

Mr. Derek Moran

I absolutely agree with Deputy Murphy.

It not the only approach because if we built an interconnector, for example, in Dublin, we may well cut emissions from transport. That would be one projects we would get a big gain from. There is value in spending to save, although it is an expensive project.

Mr. Derek Moran

We have done work with the ESRI around carbon pricing. It is quite effective but it carries with it all the challenges that we both understand.

Certainly, it is difficult for people who are struggling as it is.

The report of the Comptroller and Auditor General identified the amount by which we are now marginally a net contributor to the European Union. A significant amount of our contribution is in respect of the Common Agricultural Policy. Brexit poses a particular risk there because the UK contributes approximately 16% of the EU budget.

Has that been identified as a specific risk in respect of Brexit? The budget for the European Union still has to be worked out. It will have to be worked out in quite an uncertain environment. Is the Department of Finance profiling that?

Mr. Derek Moran

It is fair to say that, as the Comptroller and Auditor General referred to, we are projecting big increases in our European budget contribution anyway.

What will be the magnitude of the contribution?

Mr. Derek Moran

It will be €2 billion, heading towards €3 billion in the coming years.

Is it €2 billion or €3 billion?

Mr. Derek Moran

It is €2 billion at the moment but it is on a trajectory towards €3 billion because our economy is growing faster than other economies in Europe and contributions are defined by GNI.

Mr. Derek Moran

We will therefore be paying more anyway. With regard to the specific effects of Brexit, its discrete impact may be in the region of €100 million to €150 million. It is not, in itself, a game changer but it will have an effect on negotiations on the multi-annual financial framework, on how it will be funded, and on the money that will come back from it.

Mr. John McCarthy

The payment to the EU budget for this year is €2.5 billion.

That is the payment for 2019.

Mr. John McCarthy

Yes.

Does the Department have projections-----

Mr. John McCarthy

We project that the contribution will be €2.8 billion next year. On climate change and the brief I discussed with the Deputy, as a rich country we have an obligation to help the poorest countries in the world as these will be most affected by climate change. There are costs associated with that. That may account for some of the discrepancy with regard to the number I mentioned earlier. I do not have the previous brief in front of me. In addition to having a role on the tax side, the Department has a big role in financing climate action.

Cuirim fáilte roimh na finnéithe. I thank them for all of the documentation. I also thank the Comptroller and Auditor General, although I was not thanking him at 12 midnight last night.

Mr. Seamus McCarthy

I would not have been thanking me either.

Well done to Mr. Moran on the accounts. There are no issues whatsoever identified by the Comptroller and Auditor General. It is important to put that on the record. I thank Mr. Moran for that. We have no issues. I will now go into the substance and the Department's opening statement. I am not sure whether it was with Mr. Moran himself but I raised a particular issue with the Department the last time it was before the committee. I have great difficulty with something in the opening statement which reads:

I am encouraged by the robust pace of the recovery in the economy, with GDP increasing by 6.7% last year. The increase in economic activity is broadly based and economic fundamentals are strong. Ireland remains one of the fastest growing economies in the EU.

I have great difficulty with that statement. Reference is also made to our credit rating, which really reflects more on what suits the agencies who produce the ratings. I put no emphasis on that whatsoever. The reason I have great difficulty with this statement is that I have just checked and, as of yesterday, we had 10,378 people homeless, comprising 6,584 adults and 3,794 children. I cannot square that figure with that paragraph. Either I am ignorant or uneducated in these matters or the Department is taking a very narrow view of the economy and fiscal policy. I cannot accept that we are the fastest growing country in Europe and that we are fundamentally sound when that is our position. I will finish with this point and then I will ask some questions. We are now in a situation in which accommodation meant for tourists, that is to say, hotels and bed and breakfast accommodation, is used to house homeless people while the accommodation meant to house our people, that is to say, houses, is being used for tourism through Airbnb. Does Mr. Moran accept that is the position? I have great difficulty with this statement.

Mr. Derek Moran

We have had this conversation.

I wish we did have a conversation. We are always limited.

Mr. Derek Moran

The comment is on the aggregate performance of the economy. As I have already said, the economic fundamentals are strong. I could live to regret that statement but I have included a very strong "however" a couple of paragraphs later when I state that we face new challenges. Our role is to ensure, as far as we can, that the economy itself is stable, that public finances are stable and predictable, and that the revenue can be generated to address the real problems about which the Deputy is talking. I do not disagree with her in any way. As an Irish citizen, the idea of that homelessness is-----

Is it not our economic policies that are driving that homelessness? Is that not the fundamental problem?

Mr. Derek Moran

At least some of the problem derives from the collapse in 2008 and the stopping of investment that resulted from that collapse. There was no construction for five or six years. All of these issues contributed to what the Deputy is describing. It is, however, the performance of the economy that will generate the revenue to allow for spending on building the 10,000 social houses that are targeted. That is what will provide the money for capital investment.

I hear what Mr. Moran is saying but I fundamentally disagree with him. That is for another forum. It is difficult to wade through all this information, although I know and appreciate all of the work that went into it. It is premised on a completely wrong ideology, however. How can any Department say we are sound when we have that level of homelessness and such a serious crisis in housing? One simply cannot get a house to rent in Galway. Policy is forcing the market up to unsustainable levels of rent. We know that. The very policy of the Government, including the housing assistance payment and the other payments, is forcing rents upwards unsustainably. I would love it if the Department of Finance began to look at that. Perhaps I am taking unfair advantage of Mr. Moran in this regard but I come from a city in which the housing crisis is worse than in Dublin, in which the health crisis is worse than anywhere, and where a hospital is falling apart but Mr Moran is telling me our economy is sound. There is something wrong with that definition of an economy.

Moving on to specific questions, what is the second state aid case? The first was that regarding Apple.

Mr. Derek Moran

The second case relates to Aughinish Alumina.

Will Mr. Moran clarify that case for me? I remember asking him about it before and reading about it.

Mr. Derek Moran

The case relates to excise duty. I can get the Deputy a very short note on it.

I would love a longer note. I have a particular interest in the case.

Mr. Derek Moran

I can provide a longer note. After all these years, there are many long notes.

I would prefer a longer note to a shorter one on this particular issue.

Mr. Derek Moran

That is fair enough.

Is it a similar case? Is money held in escrow?

Mr. Derek Moran

No, that money is held on deposit. It is not in escrow.

Mr. Seamus McCarthy

It is in a sundry moneys account. It is on deposit.

It is on deposit. How much money is involved?

Mr. Seamus McCarthy

Approximately €16 million. I can try to find the details.

I would like a note on that. Does the independent fiscal council consist only of wise men or are there any wise women on it?

Mr. John McCarthy

Yes, there are----

I believe there are five people on the council.

Mr. John McCarthy

Yes. There were two females on the council, although one has just stepped down. It comprises Mr. Michael Tutty, Mr. Seamus Coffey, Professor Michael McMahon who has replaced Dr. Íde Kearney-----

Rather than going through the names-----

Mr. John McCarthy

One of the five members is female, but if we had been here two months ago it would have been two.

Is there a vacancy at the moment?

Mr. John McCarthy

No. Dr. Íde Kearney has been replaced by Professor Michael McMahon of Oxford.

So it is one out of five----

Mr. John McCarthy

Yes, as of this point.

-----and there are no vacancies.

Mr. John McCarthy

No.

Okay. We have gone backwards. We had two and we have gone back to one.

Mr. John McCarthy

Yes.

Members are nominated by the Taoiseach, are they?

Mr. John McCarthy

No, they are appointed by the Minister for Finance.

He has total latitude in that regard.

Mr. John McCarthy

Yes.

He has seen fit to appoint four men and one woman.

Mr. John McCarthy

The current Minister has only appointed one member. The previous Minister had appointed the others.

Very good. I thank Mr. McCarthy for that clarification. There was a review of the Irish Fiscal Advisory Council in 2005, which was good. It was an independent review to see whether the council was carrying out its functions.

Mr. John McCarthy

It was in 2015.

It was 2015. The council got the thumbs up in most regards. To go back to a question that was asked, a number of recommendations were made.

Mr. John McCarthy

He was referring to the recommendations to the council.

Mr. Seamus McCarthy

The review.

The review that was done. I am referring to it. I am not sure what my colleague was referring to. That was 2015 and a number of recommendations were made in regard to that, and the council in its wisdom decided not to follow two of them. Nobody can answer today as to why.

Mr. John McCarthy

I thought Deputy Burke was referring to recommendations that the council had given to the Department. The recommendations to the council are recommendations to the council. It was an independent review and the council is fully independent. It can choose to implement them or not, but we have no role, legislatively or otherwise.

Does the Department have a memo of understanding with the council?

Mr. John McCarthy

On how the macroeconomic forecasts are undertaken.

There is nothing in regard to recommendations like this.

Mr. John McCarthy

Absolutely nothing.

Who would be in such a position?

Mr. Seamus McCarthy

The council is independent of the Department. The financial statements are audited by me and they can be examined. The Deputy can call the council and it can provide the detail in regard to each of the recommendations and the reasons-----

They have never come before us.

Mr. John McCarthy

They come before the Committee on Budgetary Oversight after each fiscal assessment report, which is twice a year.

I will look at the accounts. The legal question has been answered.

Mr. Seamus McCarthy

For the information of the Deputy, on the point about the Aughinish Alumina case, the first direction of the European Commission was in 2005. There was a subsequent direction in 2007 and a total of €14.5 million has been recovered from Aughinish Alumina. In fact, over the time, it has gone over and back, and the money has been repaid and repaid again as the decisions went for and against the State. It is not a very satisfactory position.

Mr. Derek Moran

The case would have opened a long time before, and that is the point. We got a direction to collect the money in 2005.

The €14.5 million has been collected. It is sitting in an account and is presumably getting interest.

Mr. Seamus McCarthy

It is on deposit. That was relatively recent. It had been kept in the Central Bank but because the Central Bank is now charging interest on deposits rather than paying interest on deposits, it had to be put into a commercial-----

Mr. Derek Moran

It is fairly similar, although on a much smaller scale, to the escrow issue around the Apple money.

That is what I started out by asking and I was told "No". Maybe I put it badly. The €14.5 million is held there. The situation has improved in that it is making a slight amount of interest.

Mr. Derek Moran

Yes, we are certainly not losing money.

We are certainly not being charged by the Central Bank. It becomes more fascinating, the whole banking thing, with the Central Bank charging interest.

Mr. Seamus McCarthy

In the early part of the period when it was on deposit in the Central Bank, there was interest accruing but because interest rates over a period declined so significantly and went into negative territory, this became necessary. It is a decision of the Department to put it in a commercial bank where there is some interest, although very small interest.

Mr. Derek Moran

I could not preside over a situation where we were losing money by holding it on deposit.

There is Mr. Tobin's suggestion of putting it in the post office. He did not actually say that but-----

Mr. Gary Tobin

I would never give financial advice.

I thought he already did.

What is the position with the case? Is there an update?

Mr. Derek Moran

I happened to mention it to one of the guys recently. I think we are at a point where this might be concluded very shortly.

Can we have a note on that?

Mr. Derek Moran

Yes, we will provide a note on it.

The Comptroller and Auditor General did a special report on the EU and he had only one recommendation. I thought it was a very good recommendation, and I do not always agree with him. It was that we would have consolidated accounts on an annual basis.

Mr. Seamus McCarthy

It was for a report. The value of a report over a set of accounts is that one can look at a longer time period. The sums involved and the complexity is so great that something like the debt report was what I had in mind, or the special report we produced. Repeating that on an annual basis, or something like it, could be useful.

When did the Comptroller and Auditor General do that report?

Mr. Seamus McCarthy

I completed that report at the end of December 2018.

He has had a little while to think about it, he has had consultation on it and he has come back. Will the Department think more about it? Will there be a scoping exercise?

Mr. Derek Moran

To be fair, we have moved to look at what this involves and to take our EU policy people and accounts and finance people, and to start to scope what this would look like. I have no dispute with the Comptroller and Auditor General's view that this would be more informative, more transparent and so on. There are also projects we are doing around the Government's balance sheet in trying to get a consolidated view of that and to move to bring on some of the assets that we do not currently see, and then do an intertemporal exercise with it as well. There is a range of things we are doing. Hopefully, when I am back next year, I can outline what progress we have made on that.

It is good if there is progress but I did not get that feeling from the answer. Mr. Moran's answer was that it would involve a considerable administrative undertaking.

Mr. Derek Moran

I have not changed my view.

Has the scoping exercise started and, if so, when did it start?

Mr. Derek Moran

We have literally just commenced.

It was said the Department has started an internal scoping exercise. Who is doing that?

Mr. Derek Moran

It will be our EU budget people, the people who actually do the policy around it, and it will also be the finance and accounting functions, that is, the corporate side of the Department.

When did it start and when is the completion date? When I read this, it makes utter sense to have a report like this one. We can read it, see the money coming in and see what it is being used for. Has the Department enough staff to do it?

Mr. Derek Moran

This is one of the challenges. To take the people who will be doing this, the European team will be dealing with the MFF and the negotiation of that, and to do it is carving out time from other work they are doing. For the accounting and corporate function, we have things like financial management and shared services going on. We will address resources. We have a challenge around staffing. We have not been able to hold at our core level over the past number of years.

It was in the opening statement that recruitment did not progress at the pace anticipated and that, at the year end, staff numbers stood at 310. However, the pay bill estimate was based on a head count. Why is that happening?

Mr. Derek Moran

There are a number of reasons. Our turnover rate for the past four or five years has averaged around 20%, so 20% of the staff turnover every year.

Is there a breakdown of the grades in that regard?

Mr. Derek Moran

We can get a detailed report for the Deputy. The bottom line is that the Civil Service is expanding. Most of these people are not leaving the Civil Service. They come in, they stay with the Department, we invest quite an amount of money in our skillset and they get promoted into the wider Civil Service. Of that 20% average, only about 4% actually leave and go to the private sector and the rest go into the wider Civil Service. As a management team, that is presenting us with an enormous challenge.

Various bodies appear before us in regard to governance and accountability. It saves money in the end if there are proper procedures and proper openness and accountability in place. It seems the report, which is the one recommendation, would add to openness and accountability, certainly for the public.

Mr. Derek Moran

I acknowledge that. We will put something in place.

On climate change, an emergency has been declared, albeit in the Taoiseach's absence on the day, although I am sure he has embraced it since. Again, the report was just noted. It was the amendments that changed it.

I am not asking Mr. Moran to comment politically but that was the background. That report was being noted before the Dáil so there seems to be a certain lack of urgency - I would use the term "cognitive dissonance". We are one of two countries to declare a climate emergency yet we are one of two countries that will miss their targets. It was the amendments from the various parties that forced the Dáil to do what it did and that is the position now it has been declared. Where is the Department building that into its forecasts? The biodiversity report contained an entire section on the financial implications of what is happening with the loss of biodiversity. The Governor of the Central Bank has said that if we do not deal with it, it will be worse. I am paraphrasing the man. Where is the Department building it in?

Mr. Derek Moran

Most of what we do in terms of fiscal projection does not go on for more than three, four or five years. This period of time is very short in terms of a climate change agenda, to be clear on that.

Well, it is not actually because we have one window of opportunity of between ten and 12 years. That is all the time we have left to take action.

Mr. Derek Moran

We are concentrating our work on the bits to which we can contribute. I have already referred to it. Pricing is a profoundly difficult issue - using the pricing of carbon through tax to create a set of incentives that encourage people to use less carbon-intensive fuels. This in itself generates the revenues that allow us to do many other things referred to by Deputy Murphy. It involves getting the balance of that right. This is why we have a public consultation out. There was a recommendation to the committee that we do so and we have done so. We will move from there.

We also got the ESRI to do some more medium-term research for us. Does Mr. John McCarthy want to give a sense of it?

Mr. John McCarthy

We asked the ESRI to look at the impact of carbon going to €95 per tonne by 2030. The report was published in March. What we asked it to do and what it has done is look at the impact of that on the economy. The impact is to reduce GDP by between a half and a percentage point. We also wanted to find out what the impact would be on carbon emissions. It is work in progress. It does reduce carbon emissions but the amount would be insufficient to reach the various targets. What we were concerned about is the distributional impact of that because different people will be affected in different ways. We are working with the ESRI using the SWITCH model to try to model the impact on different deciles - different household segments - and we intend to publish that research. As the Secretary General mentioned, the tax lever is the one lever that is available to the Department of Finance. It might have been Deputy Connolly or Deputy Murphy who mentioned that it is much wider than tax and must be a whole-of-Government approach.

Absolutely. My question really concerned risk. I will leave tax for another day and the debate on it. I think it is foolish, will divide people and take the focus away from where we should be. People have asked us to acknowledge and deal with climate change. My question to the Department concerned where it was looking regarding that emergency and how it is building it into its forecasts.

Mr. Derek Moran

It involves trying to do the analysis with the ESRI around the projections regarding the impact on the economy of doing these type of things. I think the Chair of the Climate Change Advisory Committee, Professor John Fitzgerald, often refers to the point that to retrofit all the existing stock of houses will cost €50 billion. We must find the means by which we can do that over the next 20 to 30 years. That will require a lot of private money but also public support. As I understand it, over the next number of weeks, the Government is due to publish its strategy around the actions in the plans. I hope that many of the answers to the questions posed by Deputy Connolly will be in that.

I do not accept what Mr. Moran's saying regarding the liquidation of IBRC. We saw the plenary summons at the time. I think Mr. Tobin unfortunately said that we would have to ask them about their motivation. I did not realise there was a second case. We saw the plenary summons relating to the first case. It was simply looking for accountability. I am not sure if it was Mr. Moran or somebody else that was there who said that we should wait for the statement of claim. It seems absurd that somebody would have to go to court to bring about accountability. They were not looking for anything for themselves. They were simply setting out what they thought were the necessary oversight mechanisms. I will leave Mr. Moran with that. I think the Department of Finance should look at the fact that a citizen had to go to court to get proper oversight mechanisms.

There are a few small issues. In recent years, the Oireachtas has set up its Parliamentary Budget Office, something we did not have before. Can Mr. Moran talk to me about the relationship between the Department and that office? The office is trying to assist the Oireachtas in terms of knowledge for budget planning but the budget comes from the Department. Is there close co-operation or are the Department and the Parliamentary Budget Office at arm's length?

Mr. Derek Moran

There are several former colleagues working in the Parliamentary Budget Office. The population of people who produce a national budget is quite small so one is fishing in the same pond for staff. They would be colleagues. There would be that sort of connection. The critical thing is that they provide more information to the Committee on Budgetary Oversight that allows for proper challenge. The contacts are largely informal. I do not think there is a memorandum of understanding between ourselves and the office or between the Department of Public Expenditure and Reform and the office. There would be ongoing contact around information but not in a formal way. It does add to the layers of accountability and improvements in accountability around budgeting in the same way as the IFAC is fundamental.

They are busy doing reports at this time of the year and the summer analysis but in the two weeks in the run up to the budget, which is the critical time when decisions are made, they are off the pitch. This has nothing to do with the Department but I find that they are a great help when it is not needed but once the game is on, they are up in the stand. I am sorry for insulting the whole lot of you.

When did the funds land in the Apple escrow account? Was it 12 months ago?

Mr. Derek Moran

It was in October of last year.

So it came in through that.

Mr. Derek Moran

Yes. The final payment arrived in September. It came in over the summer.

I presume the people managing that account give an account back to the Department at the end of the year. Has it made a surplus? What is the reporting structure-----

Mr. Derek Moran

That is one piece of information I do not have.

Mr. Seamus McCarthy

The account is signed.

By whom?

Mr. Seamus McCarthy

By me. I have certified the account for 2018. The account is with the NTMA and will be published with the NTMA's annual report and financial statements, which will be relatively soon.

That is good to know. From the public point of view, the Oireachtas oversight of this escrow account will come through the NTMA-----

Mr. Seamus McCarthy

It can commence.

We will invite the NTMA to appear before us with regard to its financial statements-----

Mr. Seamus McCarthy

In July.

That is good to know.

I think we all had a bite of the cherry.

Mr. Seamus McCarthy

The committee should remember that it is a start-up account so it has yet to settle.

We understand that. Where is the liaison person on behalf of the State in that fund? Is it NTMA personnel? We will hold over our questions. The Department was involved in the early stages but the running of it now is the responsibility of the NTMA.

Mr. Derek Moran

We would have been heavily involved in the deeds and some of the infrastructure but, operationally, it is now with the NTMA.

It is over to the NTMA. When it appears before the committee, this will be a new element in its annual financial statements. It is nice to know that because people will be curious. There is an ongoing mechanism to deal with that.

Regarding the banks, I know that a few years ago, the previous Minister stopped the practice of appointing public interest directors to the boards of AIB, Bank of Ireland and Permanent TSB. I think the current Minister recently announced his nominees to some of the boards of some of those banks. Are all the positions filled?

Mr. Derek Moran

As far as I know, they are. I will come back to the Chairman.

I put down a parliamentary question on it recently. I think two were filled in one of the banks while they are at the final stages in the other. My real question, which is what the public really wants to know, concerns the function of the ministerial nominee to the board of directors.

Is the nominee allowed to report to the Minister or are we back to where we were with the children's hospital? Will we have people appointed by the Minister who cannot talk to that same Minister or to his or her colleagues? What is the value of this role from the public's point of view?

Mr. Derek Moran

The reality is that any directors appointed, even if they are shareholder nominees, as in this case, have a legal and fiduciary responsibility is to the bank.

They have no responsibility to the taxpayer.

Mr. Derek Moran

I have always felt that the public interest director concept was a misnomer from the outset.

It sounds nice but does not mean a whole lot.

Mr. Derek Moran

Yes. I am being frank.

I ask Mr. Moran to send us a note to clarify the role. The Minister is the shareholder on behalf of the Irish people. People hear that the Minister has a nominee on the board and one cannot blame them for thinking that the person in question is looking out for the public interest but that is not the case..

Mr. Derek Moran

In some ways, what we want to do is make sure that the quality of the directors is at a level whereby we can get to a point where we can recover the value of the banks in due course.

I ask Mr. Moran to send us a note on the role, structures, the recent appointments and when any outstanding appointments are due to be completed. They are in a process involving the Public Appointments Service as I understand it.

On the EU report outlining Ireland's transactions with the EU, this country's contribution to EU resources is 0.85% of Irish GNI. The figure for national income is different to the GNI figure and the GNP figure. That includes the value of the multinational sector in Ireland. We are getting a lot of extra corporation tax because the multinationals are based here on the one hand and we are paying a higher contribution to the EU because they are located here on the other. We all know what the top multinationals are paying in corporation tax but does the Department have a figure for the additional amount we are paying in EU contributions each year as a result of them being based here?

Mr. Derek Moran

We will see what we can do on that.

Mr. John McCarthy

We certainly can provide that information but obviously we have had multinationals here for the past 20 to 30 years. I think the Chairman is referring to the surge in corporation tax receipts in recent years due to some strange economic phenomena, which is why we have GNI*. We can do those calculations. I cannot provide a figure off the top of my head but it can be done.

I am almost surprised that Mr. McCarthy cannot do it.

Mr. Derek Moran

One of the things we cannot do is project GNI forward-----

That is what I am getting at. I am not talking about the multinationals that have been here for 20 years or more-----

Mr. John McCarthy

It is the new stuff.

Yes, the stuff that led to the development of GNI* to give a more accurate reflection. I ask the Department to provide that figure because in some ways, our EU contribution is offsetting the value of the additional corporation tax and it is important that we have the mix so we can see if there is a net benefit.

Mr. Seamus McCarthy

In figure 1, which is showing the evolution of the contribution over the last number of years, one sees a shift up between 2014 and 2015. The contribution goes up by about €300 million to €350 million. That was the period in which the big increase -----

Mr. John McCarthy

A 6% growth rate was recorded that year.

Mr. Seamus McCarthy

Yes and then looking at 2015 to 2016 and into 2017, there is not too much growth-----

Mr. John McCarthy

There was a level shift-----

Mr. Seamus McCarthy

------but the figures that were given earlier in oral evidence for 2018 show another big shift upwards.

We want the figures up to the end of 2018. We want data that are as recent as possible. I know that the increase was not so big but it is at a much higher base now. That is my question and the Department will come back to me with a response on that.

I see value in having consolidated reports because I suspect that the majority of Members of the Dáil do not appreciate that the Department of Agriculture, Food and the Marine, for example, is not accountable to the Dáil for the spending of €1.3 billion or whatever the figure happens to be. We tripped upon it here with the Department and asked it about the EU funds. The Secretary General, as the Accounting Officer, signs off on the report which is sent to the European Commission but not to the Oireachtas. There is no mechanism in place. There is nothing stopping the Oireachtas from examining the accounts and we discussed it when we came across it but there is no formal mechanism in the Oireachtas to examine all of this money coming in from the EU. That is why there would be a benefit to having a report. This is relevant, for example, in the context of what happened in the Brexit debate. People were able to make all sorts of crazy statements about how much Britain would save by not having to contribute to the EU. I am not saying that such a debate could happen in Ireland but people can make outlandish statements in this country and if the Department does not have proper figures, it cannot reject those statements. In that sense, the Department has a duty to compile those figures. The witnesses spoke about the risks in the Department. There is a risk that a Brexit-like debate could happen in Ireland, which could be damaging. All it takes is for someone in the Department to put a report together each year, including all of the important figures, so that it could respond quickly to such a debate, were it to raise its head in Ireland. One does not know what way political debates will go. One would hope that facts would win out at the end of the day but in the absence of a consolidated, factual report, the job is made more difficult.

I note from paragraph 2.3 of the Comptroller and Auditor General's report that in 1985, the UK correction lowered the contribution made by the EU by way of a rebate, which is replaced by an additional contribution by other member states. I think that was when Mrs. Thatcher got her money back. Am I right?

Mr. Derek Moran

Yes.

Obviously, France and Germany are paying a certain amount. The mechanism reduced the UK's contribution by €4.9 billion in 2017, while Ireland's contribution increased by €135 million. Has the Department worked out the figures in terms of risks to the economy of the impact of contributions to and moneys received from the EU if Brexit happens? If the UK is gone and its contributions are gone, others will be required to make higher contributions. The €135 million will not exist any more because the UK will not be making any contribution. On the other hand, because the UK is not contributing, Ireland might have to pay more to fund the CAP and everything else. I presume the Department has done a paper on that. How stands that?

Mr. Derek Moran

I think I mentioned earlier that the additional cost is in the range of €100 million to €150 million.

The additional cost of Brexit? That is a net figure. Will Mr. Moran send on whatever papers have been prepared in the Department?

Mr. Derek Moran

Yes, I will do that. It is heavily qualified because of all of the caveats.

We understand that it might never happen.

Mr. Derek Moran

It might never happen.

We will start with the first qualification, which is that it might never happen.

Mr. Derek Moran

If, for example, the customs contribution goes up, we get to keep 20% of that because we collect. There are lots of moving pieces but we will see what we can do.

All the more reason to do it. It would have been useful to have that sort of information in the public domain in recent months when we were heading towards Brexit in March. We may or may not be heading towards it again in October. The absence of a clear, simple report is unhelpful to the national debate. Such a report would better inform the national debate in terms of those issues. The point I am making is that information is helpful.

Mr. Derek Moran

In the context of a hard Brexit, we would expect the economy to slow down and in those circumstances, our contribution would get relatively lower. We will give the committee a paper-----

The Department must have a paper on it.

On the famous finance accounts, reference is made to the share capital acquired in companies, including Coillte, An Post, Bord na Móna, the Housing Finance Agency, IBRC, Permanent TSB, the Shannon Group and so on. Do we have a 100% shareholding in these? In terms of the tables on pages 27, 28 and 29, I ask the Department to supply information on the percentage shareholding in each case. I presume that a lot of these are 100%.

Mr. Derek Moran

100%

Are they all 100%, by and large?

Mr. Derek Moran

Yes. I would be very surprised if any are not. If they have an occasional capital requirement, we would make an investment.

That is fine. I suspect they are 100%. I see the ports of Waterford, Shannon and Foynes. I presume they are 100% owned by us. That answers that question but where are the AIB and Permanent TSB shares in all of this?

Mr. Seamus McCarthy

They are not-----

Are they under the NTMA?

Mr. Seamus McCarthy

Yes.

Here we are again. We are looking at the national finance accounts and there are bits of the accounts in other places.

Returning to the original comment made by the Comptroller and Auditor General, we do not have an overall picture. It is being worked on or at least being thought about.

Mr. Seamus McCarthy

We are thinking about it.

Regarding the last issue, I was intrigued to read on page 27 a statement about An Post which referred to the An Post National Lottery Company no longer trading and being in voluntary liquidation. That occurred when the licence was sold. How did that process conclude? Where did the residual unclaimed prizes in the national lottery end up when the company was wound up? There is some dispute about this issue.

Mr. Derek Moran

I do not know. Perhaps my colleagues from the Department of Public Expenditure and Reform-----

I ask that a detailed note be sent to the committee on that issue. I am raising the matter because it is mentioned in this financial statement. We would like details concerning how the An Post National Lottery Company was wound up and what happened to the unclaimed prizes. There is disagreement about these issues.

Mr. Brian O'Malley

The Chair is referring to An Post as opposed to the current licenceholder.

I am talking about the wind-up of the An Post National Lottery Company and the transfer of the final balance.

Mr. Seamus McCarthy

There is some dispute about the final amount and that is still ongoing.

That is why I am asking for this information. I know this issue was mentioned previously. It is nothing to do with the new licenceholder, Camelot, which is not covered by the remit of this committee.

Mr. Brian O'Malley

That is fine.

I ask for that note to be provided to the committee with the details of how the winding up process worked out and what difficulties were encountered at the end of the process.

I thank all of the witnesses from the Department of Finance and the Department of Public Expenditure and Reform for attending and for the information provided. Some small points have to be clarified in writing to the committee in due course. I also thank the Comptroller and Auditor General and his officials. We have agreed that the clerk to the committee will seek any follow-up information and carry out the agreed actions arising from the meeting. We will adjourn until 13 June when we will meet representatives of the Department of Children and Youth Affairs to examine its appropriation accounts.

The witnesses withdrew.
The committee adjourned at 1.10 p.m. until 9 a.m. on Thursday, 13 June 2019.