Committee on Budgetary Oversight díospóireacht -
Thursday, 18 Apr 2019

Stability Programme Update: Minister for Finance and for Public Expenditure and Reform

Chairman

Before we begin, I remind members and witnesses to turn off their mobile phones. We are meeting the Minister for Finance and for Public Expenditure and Reform, Deputy Donohoe, to scrutinise the draft stability programme update, SPU, which the Minister published on Tuesday, 16 April. The stability programme is an important pre-budget update on the Government's budgetary and fiscal planning for budget 2020. The SPU is due to be submitted to the European Commission at the end of April. This is a useful opportunity for the committee to engage with the Minister and provide him with feedback on the SPU before it is finalised. I welcome the Minister, who is accompanied by Mr. John McCarthy, chief economist at the Department of Finance, Mr. Brendan O'Leary, assistant principal at the Department of Finance, and Mr. John Kinnane, principal officer at the Department of Public Expenditure and Reform. I thank the Minister for updating the committee.

Before we hear the Minister's opening statement, I draw witnesses' attention to the position of privilege which applies to all witnesses. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If, however, they are directed by the Chairman to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person or body outside the Houses or an official either by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I again thank the Minister for appearing before the committee and invite him to make his opening statement.

Minister for Finance (Deputy Paschal Donohoe)

I thank the Chairman. Given that I have appeared before various members of the committee on a few occasions this week, and given that I forwarded my statement to the committee earlier in the week, I propose highlighting three or four points and then letting the committee quiz me on the document. I could spend 20 minutes reading the statement aloud but colleagues may have read it. If not, I can highlight some of the main issues.

On economic growth and broad economic development, the main point is that we have revised downward our growth forecast for 2019 and 2020. For this year, we had expected the economy to grow by approximately 4.2% but we now expect it to grow by 3.9%. For next year, we expect the economy to grow by approximately 3.3%, which is another revision down from where we had expected it to be next year. The reasons for that are well known to the committee, namely, what is happening with global trade around the world, signs of a slowdown in different parts of the world, the debate taking place in the United States about its economy, what is happening in the eurozone, and various tensions such as that of global trade, which are all having an effect on our economy. Nevertheless, growth rates of 3.9%, and wage growth of 3% per head, remain good for the number of people who work in our economy and for our ability to invest in the economy for the long term. We have seen the sharp and high growth rates of the post-crisis period begin to moderate into ones which are real, can make a difference to people's lives, but are more mature and, therefore, one hopes, capable of being sustained for longer, which is good.

That brings us to the information I shared with the committee about our progress with that which makes a difference to most people's lives, namely, whether they have a job, whether they can find another job and whether they can keep the job they have. The comments I made about a growth rate lower than forecast but which can still make a difference to the lives of people are perhaps most evident in that even though we have seen a decrease in how we expected the economy to grow this year and next year, we are still seeing employment growth which, by many measures elsewhere in Europe and compared with where we were in our not-so-distant past, remains strong. Last year, some 63,000 jobs were created in our economy. Even with the slightly lower forecast for this year, we expect approximately 50,000 jobs to be created, which is a strong pace of employment growth. We expect to see wages within the economy grow by approximately 3% this year. Within that 3%, many sectors will grow more quickly while others will grow a little more slowly, but an average of 3% is below the rate at which our economy is growing. Of itself, it is unlikely to generate inflationary pressure, but if we were to keep it at that pace for a longer period, it would be a positive development for many people.

On the budgetary end of where we stand overall, I will comment briefly on the structural deficit and the top-line deficit. The European Commission, which has measured our structural deficit, indicates that we should move to a structural balance of minus 1.1% this year. The Commission is currently carrying out an assessment in that regard and may make comments later in the year. If, however, we consider a form of measuring our structural balance specific to our economy, developed by the Department of Finance and endorsed by the Irish Fiscal Advisory Council, IFAC, the forecast for this year is a structural balance of 0.1%, which is ahead of our target for this year. I remember being in this room years ago and having debates about what the structural balance is and is not. There are many ways of measuring and evaluating it. The Commission will view the figure of minus 1.1% as different from what it could and should be, but from the point of view of IFAC and the Department of Finance, the balance of 0.1% reflects our measurement of where we are and is ahead of where we were expected to be. From a top-line point of view, we believe that, all other things being equal, we will move to a surplus of 0.2% this year, which is ahead of where we expected to be this year. Were the trends in our economy to continue into next year, we believe we would move into a surplus of 0.4%, but that is on a no-policy-change basis and before any policy decisions have been made. My entire statement was written on a no-policy-change basis. Overall, our debt burden, which, as a percentage of GDP, is 61.1%, is expected to decline to 55.8% for 2020.

The committee will be aware that we use different forms of measuring national income, most notably GNI*. Using that as a ratio of debt to national income, we are still in excess of 100%.

The text of my opening statement contains figures for expenditure and tax forecasts. The tax forecast for the quarter is a little ahead of where we had anticipated. The VAT performance in particular is strong and our excise performance is the strongest it has been in some years. That said, these are the figures for one quarter only. May will be a key month from the perspective of VAT, corporation tax and expenditure. Total Government spending is below profile overall and in 14 of 17 Votes. However, this represents only a single quarter and the pre-summer period, from April until June, will be the crucial part of the year.

That is an overview of the key points in my statement. I will answer any questions members wish to raise.

Chairman

I thank the Minister. As usual, we will have an initial round of five minutes followed by a further round of questions.

Deputy Michael McGrath

I welcome the Minister and his officials and thank the Minister for his abbreviated opening statement. In-year expenditure growth has been raised by the Irish Fiscal Advisory Council, which has been critical of the Government in this area. Taking the figures prepared by the Parliamentary Budget Office for 2018, in October 2017, forecasted expenditure for 2018 stood at €60.9 billion. The figure increased in the Estimates in December 2017, increased further in the expenditure report of October 2018 and increased again in the Supplementary Estimates and Revised Estimates in December 2018. Between October 2017 and December 2018, the figure increased by approximately €2.3 billion, or 3.8%, from the original forecast. Does the Minister have concerns or any observations to make on the points raised by the Irish Fiscal Advisory Council about in-year expenditure growth every year?

Deputy Paschal Donohoe

Yes, I do. I debated the points raised by the Irish Fiscal Advisory Council, particularly on unplanned expenditure in health in the second half of last year, with Deputy McGrath's colleague, Deputy Cowen, earlier today. While expenditure growth is now far lower than it was during the pre-crisis period, I take the point that in-year expenditure growth, particularly in health, as it has recurred, is an issue on which we need to do better. I return to the comments I made on expenditure a moment ago, namely, that while the first quarter looks okay, it is an issue we must follow up on throughout the year.

Deputy Michael McGrath

Corporation tax receipts continue to surge. While I know the first quarter is not a big one for corporation tax, the first quarter outturn in the fiscal report shows that receipts were much higher than anticipated. Some weeks ago, when I questioned the Minister on this issue, he said he was seeking another way of measuring the sustainability of corporation tax receipts. I asked him to consider conducting a review on its sustainability, as he had been working on the basis of the Coffey report which stated that receipts were sustainable until 2020. There have been several step changes since in the level of receipts and these appear to be continuing. Has the Minister found a way of reviewing the sustainability of our corporation tax receipts?

Deputy Paschal Donohoe

I agree with the Deputy on the first quarter. I would not draw any conclusion on corporation tax for the first quarter and the key indicator for the year will be May. Nevertheless, the chief economist in the Department of Finance, John McCarthy, and I have been looking at this issue to see if we can form a view on the sustainability of corporation tax. We hope, as we approach the summer economic statement, that we can put some options to the Dáil on how we will do that. Deputy McGrath has told me previously that he would like to see this being done independently. While he has never undermined the professionalism of my Department, the Deputy has given some reasons as to why this should be done and I am reflecting on these. I want to ensure that when we do this work we have access to the black box, as it were, that lies underneath all of this in order that we can see the nuts and bolts of what is going on. I want the Department of Finance to have ownership of the process because corporation tax is such a key variable in what will happen in future. I am reflecting on how we might do that as corporation tax changes so often. If we see things changing before our eyes, I want to have an ability to understand the changes to be anchored in the Department of Finance. I hope to present a proposal on how we will do that in the summer economic statement.

Deputy Michael McGrath

On capital spending, the national children's hospital project is running over budget by at least €450 million. The Taoiseach has referred to a figure of €3 billion for the national broadband plan. We have heard of other projects. At a local level in Cork, the Dunkettle interchange contract is yet to be signed but there are rumours - that is all they are - that the project will cost much more than was expected. I make this point in the context of the Government's commitment to a multi-annual capital plan, the national development plan, and a range of projects set out within it. Is the Minister concerned about how far the money he has earmarked will go given the level of construction inflation and pressures in the economy, including labour shortages in construction where labour rates are rising? Is he concerned that the Government may not be in a position to deliver many of the projects specified because costs are rising very quickly?

Deputy Paschal Donohoe

I am not concerned at the moment but it is something on which I must keep a close eye. We are seeing inflationary pressures develop in some parts of the economy, particularly in large construction projects. The reason I am not concerned at the moment is that capital expenditure is slightly below profile in the year to date. It might be the case that some projects-----

Deputy Michael McGrath

It normally increases later in the year.

Deputy Paschal Donohoe

The Deputy is right that it increases later the year. However, there is a "but", namely, that these capital expenditure figures and ceilings were set well over a year ago when we did Project Ireland 2040. As the Deputy knows, we are normally far below profile at the start of the year and we end up being above profile at the end of the year. That has been the case for capital spending since the crisis period. Last year, we came in almost on profile in capital spending. While it is possible that some projects will cost more, I am also aware that some planned projects may go ahead with slightly different timings. While this is an issue, I do not yet have a view on whether we need to change the capital ceilings. If we do need to change them, that will have an effect on other projects that we may or may not want to proceed. I will probably be in a better position to give a better view on that in July.

Deputy Jonathan O'Brien

Deputy McGrath asked most of the questions. With regard to how the Department of Finance calculates the structural balance compared with the provisions set out in the Stability and Growth Pact, the Minister referred to negotiations with the Commission. Will the Minister indicate how the negotiations are proceeding? Without pre-empting the outcome, what would be the impact of a failure to reach an agreement?

Deputy Paschal Donohoe

These are not negotiations. There are other things we are involved in that are negotiations but this is not one. This is all about doing an early draft of figures, sharing that draft with us and then the Commission completing its work. It is not a negotiation in the way that policy matters are negotiated. As to whether there will be a consequence, that is a matter for the Commission.

It could say, for example, that we have breached an expenditure benchmark. That is up to the Commission, however. It will publish an assessment of all of this, probably in May. I want to be open with the Deputy in saying this is not a negotiation. The Commission will form a view and then make a ruling in respect of it.

Deputy Jonathan O'Brien

Even if it is not a negotiation, surely there is some discussion taking place at least.

Deputy Paschal Donohoe

The Commission is asking us questions about the economy and we are giving it numbers in respect of it. It would not be helpful for me to try to speculate on how the process might conclude.

Deputy Jonathan O'Brien

Is there any prospect of the Department publishing five-year projections in respect of the fiscal space, particularly as a general election is approaching? That would create a fair playing field for everyone.

Deputy Paschal Donohoe

Deputy Michael McGrath raised this matter with me towards the end of last year. I indicated that when I did the summer economic statement, which we will deal with some months from now, I would provide a five-year framework setting out how we think the economy will perform. That is what I will do. The so-called fiscal space is replete with potential for errors and misunderstandings. However, I will agree with the Opposition parties a way of publishing this that allows everybody to have a benchmark for decisions they might want to make. I appreciate that colleagues will want to be able to form views regarding policies in the future. Incidentally, I am going to try to keep this Dáil going for as long as possible.

Deputy Jonathan O'Brien

The best of luck with that. On current expenditure and the projections, I note that we are looking at an increase of around 1.5% over the next years. If we look at the actual growth between 2001 and 2019, it averaged 5% every year. How realistic are those projections given what has been the case in the past?

Deputy Paschal Donohoe

The projections are lower than what the figures will be. The figure of 1.5% the Deputy cited takes account of demographics, pre-existing commitments and so on. There is a view that it should be assumed that budgetary decisions that normally happen will continue into the future. I take a different view. If that is the path we go down, we will get to a point where a Minister for Finance in the future will be making decisions on tiny parts of his or her budget. It is the preserve of Ministers who will come after me - and will hopefully be my preserve in the future - to be able to decide how they allocate a degree of funding at budget time. Expenditure growth in the future will be higher than the figures to which the Deputy is referring but that will be the result of budget day decisions that, hopefully, the Dáil will pass.

Deputy Jonathan O'Brien

Health must be a particular worry because it drives some of the expenditure increases. We saw a document last week which showed that health spending is already above what was budgeted for. I cannot predict whether there will be a need to fill another hole in health at the end of this year but in all likelihood there will be some hole to be filled.

Deputy Paschal Donohoe

Health expenditure for January, February and March was on profile. It was what the Department indicated it would be. It is the case, as the Deputy well knows, that for every other year, we have had Supplementary Estimates in the Department of Health. Last year, the Supplementary Estimate was far higher than previously. The Minister for Health, Deputy Harris, and I have spoken about this. We need to deal with where we are in health and I am absolutely committed to doing far better than we have done before in this area. At the end of each year, other Departments have needed some technical Supplementary Estimates. When all these supplementary allocations are added together, they result in a material figure. What I tried to do in this year's budget in respect of the sources of Supplementary Estimates in the past for some Departments, notably the Department of Education and Skills, was to deal with that as part of their budget day package. I want to try to reduce and eliminate additional allocations for other Departments and the Minister and I are already working on health expenditure. I informed the Dáil earlier today that after Easter I will sit down with Government colleagues to review where we are with a number of particular Departments. The Minister for Health and I have already met twice now on health expenditure.

Deputy Jonathan O'Brien

Deputy Michael McGrath asked about the capital spend and the likelihood that we can achieve what we set out to achieve by 2040 because of the increased construction costs. To paraphrase the Minister, he said he was not concerned right now about that. It is clear that construction costs are only going one way. I presume, because of the tightening in the labour market, that wages will go in only one way. It is obvious that the Government will not be able to achieve what is envisaged. If things are costing more and we are paying more in construction costs and wages, there will be less to spend on capital projects. The Minister said that some of them may be pushed out for various reasons. I am not suggesting that some of them are being cancelled or anything. Can the Minister give us some more detail on projects which may be pushed out? Are there valid reasons for this? Is planning the issue?

Deputy Paschal Donohoe

I was simply saying that for now, I cannot give the committee an assessment of where our capital ceilings might be for next year, beyond saying that we have a capital expenditure increase of approximately 10% or 11% already baked in for next year. We already have that provisioned in our figures for next year. All I was suggesting was that it is entirely possible that it might take some projects longer to go through the planning process or even the tendering process than we had initially thought. It will be towards the latter part of the year before I can give the Deputy a data-based view of that.

As against the picture the Deputy has talked about, there are two other things we should consider. The first is that economic growth figures of over 3% for this year and nearer 3% for next year are very different from where we have been in recent years. That may have an effect on the issues to which the Deputy is referring. As I said, I will need to move later into the year to see it. The second factor is that wage growth is at 3% at the moment. If that were to continue, again, it might have an effect on the issue. I am not discounting the risk because clearly we can see one project that cost more than expected. However, I would be stretching things to place the blame for that on labour market inflation. We are all aware that prices in some parts of the economy are higher than they were last year. However, from my point of view, with overall expenditure at the moment of around €7.3 billion in capital for this year, it is too early to say if those trends are having a material effect on the delivery of projects.

For all of the discussion of inflation, productivity levels in the construction sector here are 24% below the European average. If we were able to claw back a little bit of that, it would do more than enough to offset the inflationary risk the Deputy is talking about. It might seem a very mundane matter but the work that my Department has under way in respect of building information management, coming up with new IT ways of storing the designs of buildings, has the potential to have a very positive effect on public procurement.

Deputy Martin Heydon

I thank the Minister and his officials for coming in. It is very much welcome that the Government achieved a surplus of €50 million in 2018.

That was the first surplus since 2007. There was an improvement in the deficit of €830 million in 2017. How does the Minister intend to use the surplus? I do not expect him to announce the entire budget now but I ask him to give us an insight into his thinking, in broad terms. Critically, does he believe that a surplus can be maintained after Brexit?

Deputy Paschal Donohoe

The first thing I want to do is to collect this surplus. My first objective is to make sure it is delivered. What I want to do with it is grow it into next year. We will deal with this in more detail in the summer economic statement but a fair chunk of the surplus of 0.2% is coming through what we think might happen with corporation tax during the year. Our economy should be in a position, if it continues to grow next year, to continue to have a budget surplus. In terms of Brexit, though, the position could change very rapidly. We believe the effect of a no-deal scenario on the general Government balance would be a move of 0.5%. The surplus would very quickly go and the economy would begin to run a significant deficit. Over a ten-year period, in the event of a disorderly Brexit, the deficit would amount to nearly 1%.

The answer to the Deputy's first question is that we will try to collect the surplus, preserve it, make sure we come in at that point and hopefully grow it in the future but a no-deal Brexit changes all of that completely. It would put us in a deficit position and more than likely, it will be a deficit position that will not be the result of temporary, one-off things. It will be a deficit position because our terms of trade with the United Kingdom will have completely shifted. This Government and future Governments will have to respond to that.

Deputy Martin Heydon

That answers my second question to some extent. I was about to ask about forecasting in the context of a disorderly Brexit but obviously that work has been done. We all hope that it will be a soft Brexit.

I am a member of the Joint Committee on Climate Action which published its all-party report recently, ahead of the launch by the Minister for Communications, Climate Action and Environment of his all-of-Government plans. Climate action is the issue of this generation and if we did not have Brexit to contend with, it would be top of the agenda. I ask the Minister to outline the financial implications in the longer term of our approach to climate action in light of the committee's report and the forthcoming announcement from the Minister, Deputy Bruton.

Deputy Paschal Donohoe

It is difficult for us to give a view of the economic effects of climate change on our economy. However, on page 49 of our document we have called out climate change and our renewable energy targets as representing a high risk for the economy in the medium term. The Department and I decided that we would call this out as being a risk in a way that we have not done in the past. It is certainly something that will frame my thinking in terms of what we do on carbon taxation.

Deputy Martin Heydon

Finally, in relation to the area of tax harmonisation, in the country report for 2019 on Ireland reference is made to recent European Commission proposals to move towards tax harmonisation and qualified majority voting on the EU's tax policy. I ask the Minister to outline the discussions that he has on this in Europe and how such proposals are viewed by other member states. Do we have many allies in the EU in this area? This is crucially important in the context of our small, open economy.

Deputy Paschal Donohoe

Deputy Heydon raises a very topical issue. At the most recent informal finance Ministers' meeting we had in Romania, this was a subject for discussion. As the Deputy has said, the European Commission has indicated again that it will publish proposals to remove the principle of unanimity from taxation decision making in the future. It is apparent to me that for all kinds of different reasons, many countries have a big concern about that. In the past, it would have been only Ireland and one or two other countries with the strongest views on this matter but now there are more countries, for different reasons, sharing our view.

If I may, I wish to go back to Brexit briefly. Reflection will be required if we find ourselves moving into October with no clarity on where Brexit stands, especially in the context of putting together a budget a few weeks beforehand. I wish to flag to the committee that such a situation would require a lot of thought from me and from the Government and a lot of engagement with the Oireachtas. It is one thing to put together a budget, as we did last year, where the central case scenario was that an orderly agreement would be reached. It is pretty likely that this will continue to be the central case scenario in that we know that we will go all the way up to at least October with the current trading conditions and political relationships continuing. However, finding ourselves in October with the UK due to leave that month will require work and a great deal of effort in terms of dealing with it.

Deputy Martin Heydon

Just on that point, do we have any flexibility around our budget date?

Deputy Paschal Donohoe

This is something on which we will have to engage with the European Commission. There is a requirement to have our budgets in at a particular point in the semester. I am not saying that I have made a decision on it but the value of Irish budgets in recent years has been that we have been able to indicate certainty regarding where we stand. The Deputies have raised issues regarding unplanned expenditure and certainly there are issues on which we need to do better. We need to have an agreed view on what is to happen in the economy over the coming years but if we find ourselves in a position where the fate of Brexit is not yet known and we are preparing a budget, that changes the context entirely. I look forward to working with all colleagues on that during the year.

Deputy Martin Heydon

That makes sense. I thank the Minister.

Chairman

Deputy Boyd Barrett is next.

Deputy Richard Boyd Barrett

I thank the Minister for his contributions so far-----

Deputy Paschal Donohoe

For my what, sorry?

Deputy Richard Boyd Barrett

For your contributions so far.

Deputy Paschal Donohoe

Thank you.

Deputy Richard Boyd Barrett

We have dug ourselves out of a very big hole from the bottom point of the recession to where we are now in terms of getting back to economic growth, restoring employment and so on. However, we still have massive hangovers from what happened and the actions taken during that period. We still have a massive level of debt, which the Minister has said is very worrying. We also have a very big housing crisis, a big problem with our health services, infrastructural deficits in a number of areas and so on. There are some very big hangovers and now we are starting to see warning signs of things going against us. Brexit is a significant risk which is likely to negatively affect economic growth. Global trade is beginning to contract and we do not know where that will go. Climate change, as has been mentioned, poses a high risk because we have done extremely badly in terms of addressing it. We are way behind the curve in that regard. We also have an over-reliance on a small number of multinationals which the Minister rightly identifies as high risk. Does the Minister think that we are acting with the sort of urgency and radicalism required to address these problems, given that they are coming at us now when we are still suffering the very severe hangover from the recession? I do not see any ambition on climate change. We are way behind and we are still trying to expand sectors of the economy that are contributing to global warming, particularly agricultural exports. That does not make sense. We are talking about a carbon tax but we have not even done research on its potential impact.

The research I have seen on British Columbia shows it has no impact, setting aside the arguments about the fairness and so on, and that is the only thing the Minister is talking about. Where is the radical ambition to diversify the economy and shift things? Brexit, the slowing down of global trade and the overemphasis on multinationals highlight the need for us to diversify the economy to insulate ourselves. I do not see the ambition.

To follow up on our earlier discussion, we have talked about how one private company effectively has us over a barrel on broadband and what its cost could be. We have seen the overruns on the national children's hospital. Another serious danger in expenditure is our reliance on the private sector to deliver our housing output, particularly social housing. The cost of that is going to be extortionate. That sector also has us over a barrel. There is no reason to believe that the cost will do anything but escalate.

Deputy Paschal Donohoe

This Dáil and Government have acted with more urgency than we sometimes get credit for, particularly when it comes to tax policy. It is to the credit of Deputy Boyd Barrett and Deputy Lahart and his party that they have been willing to support measures like that. In the period that led up to the crash decisions that narrowed the tax base were never reversed when times were good. We have done that in the past two budgets. We made a big change in VAT, which was contested by many. That has the potential to bring in between €500 million and €650 million extra per year. It is a big tax change. We made a decision on stamp duty on commercial property. That is exactly the kind of change that never happened before yet we were able to assemble a majority in the Dáil to do that. Many other smaller scale measures have happened but those are big tax changes that a minority Government was able to make happen with support in the Dáil.

Carbon tax could be another one. Deputy Boyd Barrett quoted evidence from British Columbia. The evidence from the ESRI shows that a high level of carbon tax can reduce emissions. I hope the parties of the left will not again oppose using tax policy as a way of affecting behaviour and raising revenue to invest in environmental measures, although I have a feeling they will. If that is where we end up it will be another thing that makes the Irish left and far left very special in the European setting. We can build a consensus for doing that.

The Deputy talked about radicalism and our expenditure. Capital expenditure for this year is increasing by 24%, which is a €1.4 billion increase. It is making a big difference to projects all over the country, for example Grangegorman in my part of the city, O'Devaney Gardens, and Dominick Street. That is just a small part of our city.

Deputy Richard Boyd Barrett

I would not use Dominick Street as an example.

Deputy Paschal Donohoe

They are both happening.

Deputy John Lahart

On a very small scale, much smaller than------

Deputy Paschal Donohoe

They are both funded and anybody who thinks O'Devaney Gardens is small scale should come out and see what is happening there. They are all examples of things that are happening. Of course we could be more radical and do more but the question is whether we can build a majority of votes to do that.

Deputy Richard Boyd Barrett

The left supported the Government in the VAT increase.

Deputy Paschal Donohoe

Yes, it did.

Deputy Richard Boyd Barrett

We proposed the stamp duty on commercial property in our budget submission. Whether that is where the Minister got it from I do not know but we proposed it the year before he introduced it. The idea that we are not willing to make, or side with the Government in making, radical proposals in this area is unfair. I am just pointing out to the Minister that there is no good evidence for carbon tax but there is very strong evidence that it becomes a substitute for doing things that would be radical and make a significant impact on carbon emissions, where we have failed dramatically. He did not respond to the point that other areas of industrial policy are going away from diverting our economy away from reliance on sectors that dramatically contribute to our poor performance on CO2 emissions.

Deputy Paschal Donohoe

That point is fair. Other parts of the economy need to play their part and this is why the all-economy plan that the Minister for Communications, Climate Action and Environment is putting together will be important because all parts of our economy have to play a role. I agree with the Deputy on that. No Government on its own will be able to respond to the significant challenge of climate change but it is the responsibility of Government to take leadership on this. Under Ireland 2040, our investment in public transport and in renewable energy, are part but not all of it. In the debate on carbon taxation that I sense is approaching perhaps the Deputy could give me examples of economies that have done well in reducing emissions without using carbon tax as part of how they did that.

Deputy John Lahart

I thank the Minister and his officials for their willingness to attend, unlike one of the Secretaries General, to whom the Chairman has written several times. I am sure there will be another opportunity for us to meet him.

I am delighted that the Minister has committed to meeting formally with the Minister for Health to monitor the health budget. He said that he and the Minister have met on a few occasions in that respect. What is the context of those meetings? Are they formal meetings with officials from both sides present? What kind of issues have they been discussed in those meetings and how regular have they been?

Deputy Paschal Donohoe

There have been two formal meetings, with officials on both sides. We have had only two because there is little point in meeting in January or February because there is a time lag before we can see exactly where expenditure has been and from the end of February up to this point we have had two formal meetings on the subject and the Minister and I will meet again towards the end of April. The Deputy is aware of where we ended up last year. We consider recruitment and expenditure in different segments within the Department's Vote.

Deputy John Lahart

Did any red flags emerge at those meetings?

Deputy Paschal Donohoe

It is too early in the year for us to form a view on it. January, February and March were on profile. January and February health expenditure was below what we have seen previously. March expenditure was a bit higher than before. One of the many lessons I have learnt from what happened in the past 12 months is the need for us to continue to engage on this issue and have an aligned understanding of how the expenditure is developing during the year. We did better on it the year before last.

Things did not go as we wanted last year. For the third year in which the Minister, Deputy Harris, and I are working on it, we are looking to find new ways to deal with it. That is why we are doing these meetings. Officials are present. My officials have been meeting officials from the Department of Health in the run-up to each of those meetings.

Deputy John Lahart

Was expenditure lower than expected in January and February and higher in March?

Deputy Paschal Donohoe

It was across all parts of the Vote. In January and February, the health expenditure was lower than those months in the previous year and it was a bit higher in March. To break that down, we then look at where we are by hospital group and by different parts of the HSE. There is a further time lag before that becomes available to us, normally a couple of weeks. As we move into April and May, we will have detail that is of use to us regarding where we are, well below the health expenditure Vote top-line.

Deputy John Lahart

With regard to the property tax, what does the Minister say to the people who live on one side of the road and have been paying property tax continuously for a number of years, while someone who buys a newly-built house opposite them is paying no property tax?

Deputy Paschal Donohoe

I aim to ensure that their neighbour is paying property tax in the same way that they are. I aim to have that in place for the revaluation that will take place towards the end of next year. I am well aware of the issue that the Deputy raises. I am also aware of what has happened and of revaluation points for taxes such as this all over the world. The Deputy should look at the report I gave to the committee, which I know I will engage with it on later. The committee said a while ago that there were two different models it wished to look at regarding how well property tax could work. One was to have a model in which yield for the country is fixed and each local authority can vary the rate, or a model in which we fix the rate for the country and have that give the yield that it does. After months of poring over many different tables and ways of doing it, it became apparent to me that because of the different levels of price growth in different parts of the country, the consequences of either of those two routes would be very different from what even the Deputy may have expected. I will ensure that we can retain that tax. I have some ideas about how we will do it. When the Deputy looks at my report, as I am sure he has, the consequences of the different options that the House and I have considered may be different from what was initially thought.

Deputy John Lahart

The Minister expects an increased yield from it, given that thousands of properties that are not included in the existing local property tax will be brought into a revised or reviewed local property tax. Would that yield be commensurate with the numbers that are being brought in or does the Minister expect to increase the yield anyway?

Deputy Paschal Donohoe

While it is far too early to say, I expect that the majority of the additional yield will come from new homes that are brought into the tax base. An essential thing that we should be able to do is to demonstrate that all properties are taxed the same regardless of when they were built. For example, if we said that we wanted to bring new homes into the local property tax-----

Deputy John Lahart

As they are valued now?

Deputy Paschal Donohoe

That is the point. If we brought them in at present value, that would automatically mean that all homes built before that point have to be taxed in the same way, which would mean an immediate increase in yield from existing homes. We looked at an alternative way of doing it, to see if there would be a way to ascribe a nominal value to homes that have been built since 2013 and to use the 2013 valuation. After much examination of this, it became apparent to me that there is no easy way to do that. I believe we should bring the homes that have been built since 2013 into the tax base because otherwise the inequity the Deputy referred to will only grow. The best and fairest way to do it is to bring new and existing homes in at the same valuation point. I will recommend that and believe the House should do that when we get to the point of passing legislation on the tax.

Chairman

I am conscious that the Minister will return about this in a month to address it extensively. We can continue then. I have one or two issues to raise myself. As Chairman, it would be remiss of me not to make the point which Deputy Lahart has alluded to. We feel that as a committee that when we make a request of officials from the Minister's Department, they should attend, particularly officials who have indicated that they believe they have a report for this committee. We would like that to be noted. We have communicated about this and the committee has raised it on a number of occasions.

One of the areas that I am interested in which we have not touched on at all is the EU multi-annual financial framework, MFF, and its impact on the Irish budget. I do not know what the Minister's thoughts are on Commission proposals. I know it is only a negotiation process but some proposals floating around would have a direct impact on our budget.

Deputy Paschal Donohoe

I will address the second point first. Even though it does not feel like it, we are at a very early stage in all of the discussions on the MFF. It is likely that this work will accelerate towards the end of this year. It will have to. There are scenarios in which our contribution to the MFF will go up. In a speech to the European Parliament a number of months ago, the Taoiseach said that he believed that Ireland should pay more and make more of a contribution to the MFF, which I wholeheartedly agree with. If we have benefitted from the European budget in the past, and given the kind of support we have received from European institutions in the past year, I believe that we should make a contribution. We are thinking through the budgetary consequences of all of that. If I was to start talking about figures now, it would not reflect the fact that we are in a negotiation. Before I get to the point of explaining to the House the additional contributions that we might need to make, it is probably better that we gain a firmer view regarding what the Commission will look for and why. When we have done that, I would be happy to come back and update the committee on that and its budgetary consequences.

Chairman

I thank the Minister. We will conclude shortly. I call Deputy Jonathan O'Brien.

Deputy Jonathan O'Brien

With regard to the national debt, I know that the projection for Government debt over the next five years will not see any great movement to reduce debt. Table A5 on page 65 refers to the general government debt to GDP ratio. It has reduced significantly from 64.8% to 51.6%.

Can the Minister explain that given that the closing debt balances in five years will be similar to those in 2018?

Deputy Paschal Donohoe

The Deputy is correct. Table 13 refers to some of the figures he has touched on and shows that while our national debt will dip in 2020 to under €200 billion, it will then increase again. There are two reasons for that, however. The first is whether the Government of the day will make a decision to run larger surpluses than are currently set out in this document. I mentioned earlier that all the figures were set out on a "no policy change" basis. If the Government of the day were to decide to run larger surpluses, that figure would begin to come down. The second thing that would be open to us relates to one-off gains. I am of the strong view that if one-off gains become available to the State, we should use all or nearly all of the amounts to reduce that debt. I believe there will be one-off gains available to the State that could play a material role in reducing that figure. There will be a global shock at some point and we are part of a global economic cycle. When the economy moves into the next recession globally, the lower that debt figure is, the better will be our ability to withstand the challenges we may face. It should go without saying that the other variable in the context of which that figure must be considered is the ratio of debt to national income. The Deputy is asking me about a stock – the amount of debt we have – but we also expect the income we have to grow across the coming years. That will bring out debt down as a percentage of national income. I think about the stock a great deal, however.

Deputy Jonathan O'Brien

Is the majority of Government debt at fixed interest rates and what proportion is?

Deputy Paschal Donohoe

Approximately 90% to 95% is at fixed rates. If the Deputy looks at page 34 of our document, the average interest rate across the period is set out at the bottom of table 13 and it is approximately 2%, which is a staggering turnaround from where we have been over recent years. If one goes back to the point I made earlier, one sees that as a percentage of gross national income, our debt begins to come down quite a bit, in particular after we go through 2020. If the Deputy was to use debt as a percentage of GDP, it would be a far lower figure, continuing to reduce. Indeed, that is at the top in the second row. Debt as a percentage of gross national income is a better measurement of how we are doing.

Deputy Richard Boyd Barrett

On the housing issue, does the Minister recognise that the lack of affordable housing is a macroeconomic problem affecting our ability to bring migrants back, stop the outward flow of people we need in a number of sectors, and foreign direct investment? If so, how will that challenge be addressed? We had a discussion earlier about Rebuilding Ireland. We can debate the balance relating to current expenditure, which we did earlier, but, whether we agree about Rebuilding Ireland, we have to phase out at some point the heavy reliance on current expenditure to the private sector to deliver social housing because it is not as good value for money as doing it ourselves. If the Minister accepts that, we must surely move faster than we are moving given the risk. Apart from the housing problem, it is a risk to be so dependent on something that is so costly. Has he quantified that risk fully and calculated the amount pouring out in billions of euro in RAS, HAP and leasing to meet the targets of Rebuilding Ireland? Does he get my question?

Deputy Paschal Donohoe

I do. The Deputy asked if I want to change the balance between current and capital expenditure on housing and the short answer is, "Yes, I do". On his first question as to whether I accept this is a macroeconomic or overall risk for the economy, the answer is also "Yes". The Deputy and I differ on many things, as he well knows, but I accept the genuineness with which he approaches this issue, as he accepts my genuineness too. However, the balancing act I am attempting at all times involves building more homes in a sustainable way for our economy and as quickly as we can. The Deputy does not think we are spending enough in capital expenditure in our economy. He has argued that point with me many times and we have different views on it. However, to increase capital expenditure by one quarter in one year is as significant an increase as one will find in our recent economy history. I did that because I accepted that there are many legacies from the awful period we went through that are causing trauma and anxiety for many of our citizens today. Even if they were not legacies but were rather issues we were starting to face in 2019, we would want to do better. I do not want families and young children growing up in circumstances in which the only home they have ever known is a hotel bedroom. We can address that and we will. That is why we have made these increases in investment.

Chairman

I thank members and the Minister. I thank the Minister and his officials for attending. It is particularly appreciated given the scheduling conflicts there were, notwithstanding which the Minister made himself available. I acknowledge the members of the committee who stayed to contribute and involve themselves in our meeting.

The select committee adjourned at 3.40 p.m. until 2 p.m. on Wednesday, 8 May 2019.