Committee on Budgetary Oversight díospóireacht -
Wednesday, 1 Jun 2022

Fiscal Assessment Report: Irish Fiscal Advisory Council

Chairman

Members and all in attendance are asked to exercise personal responsibility in protecting themselves and others from the risk of contracting Covid-19. They are strongly advised to practise good hand hygiene and to leave at least one vacant seat between themselves and others attending. They should always maintain an appropriate level of social distance during and after the meeting.

Before we begin, I will explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses may make to other persons in their evidence. The evidence by witnesses who are physically present or by those who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. Witnesses are reminded of the long-standing parliamentary practice to the effect that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory with regard to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative they comply with any such direction.

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, her or it identifiable. I remind members of the constitutional requirements that members must be physically present within the confines of the place in which Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate where he or she is not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.

Today, we will engage with the Irish Fiscal Advisory Council. On behalf of the committee I welcome Mr. Sebastian Barnes, chairperson, Dr. Adele Bergin, Mr. Alessandro Giustiniani, Ms Dawn Holland, Professor Michael McMahon, who are council members, and Dr. Eddie Casey, chief economist and head of the secretariat I invite Mr. Barnes to make his opening statement.

Mr. Sebastian Barnes

The council thanks the committee for inviting us. It is very nice to be back in person after two years. We value our engagements with the Oireachtas very highly. These are important opportunities and an important part of our work. The council is an independent body established under the Fiscal Responsibility Act 2012. Its mandate is to endorse and assess the official macroeconomic forecasts, assess the budgetary projections, assess compliance with the fiscal rules and assess the fiscal stance. Our focus is on the overall fiscal stance, rather than on individual tax measures or spending items.

Yesterday, the council published its 22nd fiscal assessment report. It is based on the Government’s forecasts published in April in the stability programme update, SPU, 2022. The Irish economy has continued to grow, despite the challenges. Higher energy and food prices have taken inflation to the highest rate in a generation. While this will slow growth in 2022, the economy is expected to continue to grow in the years ahead, helped by the high-pay and high-tax sectors. Nevertheless, developments remain uneven across sectors and higher inflation impacts lower-income households far more than the average or wealthier households. Risks and uncertainties are also high. Inflation could remain higher for longer than the SPU assumes and there are downside risks to activity. We also note with concern that the SPU only projects three years ahead to 2025. This undermines a medium-term approach and good planning for budgetary policy. The council strongly recommends a return to five-year-ahead forecasts as was committed to by the Department of Finance and confirmed by the Minister in the past.

The budget balance is being boosted by revenues from a faster-than-expected recovery from Covid-19 and continued growth in high-pay, high-tax sectors. Over the medium term, the budget balance is set to reach a surplus in 2023 and to improve to a surplus of 2.7% of GNI* by 2025. This should help to put Ireland’s debt ratio on a steady downward path to reach 80% of GNI* by 2025, down from 106% of national income in 2021. However, there are significant pressures on many spending areas. Some of these are known, others have not been factored into the budgetary plans. In terms of spending, we broadly know that, first, higher inflation creates significant spending pressures. The council estimates that each one percentage point increase in inflation in the economy would create pressures on Government spending of approximately €700 million just to stand still if pay, welfare, pensions and the costs of goods and services were fully adjusted to maintain their value in relative terms as prices increase. We assess that the planned increases in current spending under the Government’s 5% spending rule over 2023 to 2025 would not be sufficient if the Government opted to fully maintain existing supports and services in real terms, although for later years the shortfall is relatively small.

This implies that the Government will need to make choices between accommodating price pressures, other changes to spending plans and revenue-raising measures. Second, there are likely to be temporary costs associated with the war in Ukraine. Of the €7 billion in contingencies for spending set out in budget 2022 back in October, €2.5 billion remains unallocated. This may be spent on humanitarian assistance for Ukrainian refugees but it could also be used for further temporary and targeted cost-of-living measures. Third, the Government plans to ramp up public investment spending to almost 5% of national income by 2025 and keep it at this high level out to the end of the decade. The increases should help to meet climate change and housing objectives but capacity constraints in the construction sector could see higher costs or lower output for a given price. Poorer value for money and possible spending overruns could result and a high degree of diligence will be required. Fourth, many countries are considering raising defence spending in the light of the war in Ukraine. For Ireland, the report of the Commission on the Defence Forces establishes a range of different scenarios.

However, there are many areas where we are in the dark on the Government’s plans. The Government committed to halving Ireland’s greenhouse-gas emissions by 2030 but it has not factored in the full costs to the State of achieving this. Estimates from Mr. John FitzGerald in 2021, in a very useful piece of analysis, put the cost at an additional 1.7% to 2.3% of GNI* on average over the years 2026 to 2030. The Government has also not costed its planned major healthcare reforms under Sláintecare beyond this year and there is no clarity on how much progress has been made to date in terms of the overall cost of the reforms. The Government has also not responded to the Pensions Commission recommendations on how to address funding shortfalls in the pension system. Annual spending on pensions is set to rise by about 1.5% to 2% of GNI* by 2030 amid a rapidly ageing population. The upfront fiscal costs of auto enrolment also need to be built into future budgets, if implemented.

The Government faces a delicate balancing act between supporting the economy and vulnerable households in the face of higher inflation while not contributing to higher inflation through second-round effects. Sticking to the 5% spending rule, as the Government commits to and as the council welcomes, should help with that objective and with facilitating the debt ratio falling at a steady pace from high levels. Reducing the debt ratio in line with these plans would be appropriate to help build a buffer so that future shocks, particularly major downturns, could be cushioned by budgetary supports in a similar way to the response during the pandemic. Following the rule would also help to ensure that spending increases do not lead to excessive stimulus to the economy at the current time and would help avoid the risk of second-round effects on wages and prices potentially destabilising the economy and the public finances. However, sticking to the rule also highlights the difficult trade-offs that are involved. The various spending pressures that we have discussed raise significant questions about how they will be accommodated within the Government's spending rule alongside existing policies. Sticking to the rule could imply reductions in planned spending elsewhere or higher taxes.

In the background to all this, an ongoing concern of the council’s is the growing over-reliance on corporation tax to fund everyday public services. Corporation tax receipts represent nearly one in every four euro of tax revenue raised by the Exchequer and the top-ten paying companies account for more than half of those receipts, up from a quarter in 2008. The Government does not currently have a strategy to reduce this over-reliance. The council’s assessment is that the Government should clearly show the impact of excess corporation tax receipts on the budget balance, as we do in this report and it should take measures to reduce its reliance on corporation tax. The council has set out a way to achieve this by making contributions to the rainy day fund or running debt down. The Exchequer has benefited significantly from corporation tax receipts in recent years which could be considered excess, that is, beyond what is explained by the performance of the domestic economy. By using these excess receipts to fund ongoing expenditure, the Government has potentially opted not to set aside some €22 billion in a rainy day fund or to reduce net debt by a substantial amount.

I thank members for their attention and look forward to their questions.

Chairman

Thank you Mr. Barnes. Deputy Doherty is our first speaker.

Deputy Pearse Doherty

I welcome our witnesses and thank them for their fiscal assessment report. There is always a wealth of information contained in the council's high-quality reports.

In the context of the unequal impact of heightened inflation, the council outlines in its report that there is potentially space for additional, targeted one-off measures to support those who are most vulnerable to the current inflation shock. We are looking at a rate of 8.2% but for low and middle income earners, the rate can be higher. Does the council agree that there is scope for targeted additional measures?

Mr. Sebastian Barnes

Yes, there is scope for additional targeted measures in two senses. First, in terms of the budgetary numbers and temporary measures, there is still space because there are still contingencies that are likely to be available this year, even within the existing budget. Second, looking ahead, or taking this year and next year together, within the Government's spending rule there would be space to do that. However, as we have highlighted, there are choices between how far we take measures to deal with the cost-of-living crisis as compared to other policy initiatives the Government might want to take. The reality is that we are having to pay more for imports of energy and food and if we need to provide more help to some households, that is going to cost extra money. That needs to be weighed against other potential alternatives.

The other way in which there is space, potentially, is that there is some room to do that without over-stimulating the economy. What is good about targeted measures is that rather than just pumping money in across the board, they give it to those who really need it the most. Lower income households spend around one third of their income on food and energy so this is a huge shock for people who do not have many savings to fall back on. For wealthier households, it is a much lower share of their spending and of course, they are in a better starting position as well.

Deputy Pearse Doherty

It is good to hear that. Just before coming in here today we heard an announcement from PrepayPower that electricity prices would increase by 10% and gas by 20% on top of what has already happened. There is a breaking point here and some have already passed it.

The council has been critical of the Government's lack of a targeted approach in its interventions to date. The report refers to about €1 billion worth of interventions since the start of the year up to the publication of the Stability Programme Update, SPU, about 90% of which were untargeted. According to the council, this means that substantial public resources are being transferred to individuals who already have high incomes and who are, therefore, just likely to increase their savings. What is the impact of this level of untargeted measures on inflation itself?

Mr. Sebastian Barnes

The Government has to strike a delicate balance between protecting the economy from this big shock to people's spending power and helping the most vulnerable while on the other hand, not pumping too much money into the economy at a time when inflation is already high. The Government can improve that trade off by directing more money towards those who need it most rather than spreading it out more equally. There is a case for stronger targeting but it is obviously difficult. Targeting is not an easy thing to do. We know that poorer houses need to be targeted, as do rural households and older households but even within those groups, not everyone is treated the same. There is a difficult mix and that is why we do not come down particularly strongly in any particular way, partly because it is not our mandate to look at the exact design of specific measures but also because we recognise it is a difficult thing for the Government to do. It must make a number of judgments and trade-offs which is its job, rightly, and not our role.

It may be helpful to consider using either the welfare system or the tax system in more creative ways than they have been used in the past to make sure the money is going to those who need it most because that will strike the best balance. The impact of this shock is radically different across households.

Deputy Pearse Doherty

Mr. Barnes mentioned the welfare system. To date, since the start of the year we have not seen an increase in core social welfare working-age payments. In order to be in line with the average inflation rate that we are likely to see over the course of the year, predicted to be 6.2%, those rates would need to increase by €7.50. Would that be the type of targeted measure that would not risk second-round effects on inflation? Is that the type of approach that the council is suggesting?

On the quantum of interventions, if they were targeted, what level of space is available?

Mr. Barnes spoke about the unallocated resources of €2.5 billion, and that a portion of it may be used for Ukrainian refugees. The assessment by the Irish Fiscal Advisory Council, IFAC, is that not all of this will be needed. The council also recognises an improvement in balances. This is probably an improvement even from where the stability programme update, SPU, suggests our deficit would be at the end of the year. In Mr. Barnes's view, what quantum of fiscal space is available at this point in time?

Mr. Sebastian Barnes

These are generally very difficult questions for anyone to answer with regard to what policy should be. I will, however, make a couple of points in response.

A difficult judgment is being faced between temporary and permanent measures. We do not know how long these price shocks will last. We are aware that energy prices and food prices can be very volatile. They may well go up and make the next winter very difficult in Europe. On the other hand, they could also go down if things work out better than expected. The Government must think about the balance between temporary measures where we make these once-off payments or time-limited payments, which is mostly what the Government has done, versus these permanent increases in welfare payments that would, essentially, be required to keep their real value over time but would need to reflect the fact that prices may fall. This is the temporary versus permanent split the Government must think about.

The second point is the exact amounts. It is a very difficult question. Again, it depends on which instruments the Government wants to use, what combination it wants to use, and to what extent it wants to target. The important part about targeting is that even just raising welfare rates in line with general inflation probably would not fully compensate the lower income groups who are spending a much higher share of their income and facing a much faster rate of increase than the general population. That is an important point to bear in mind. Ultimately, I believe the Government needs to co-ordinate across policies. IFAC has also suggested co-ordination with the social partners on how the whole package will look.

The Deputy asked about the amount of fiscal space. We believe that the Government's spending rule is actually providing useful guidance. It is forcing the point that there is a choice between how much is ultimately spent on the permanent increases in welfare payments and other things. We are not taking any view on how that choice should be made. That is a democratic choice but it is forcing the right kinds of questions to be asked.

One very helpful aspect is that the Government seems to be interpreting the rule in terms of the level of spending. In 2021 there was a big underspend. If the Government was to lock in that underspend it would create more space to tackle the cost-of-living crisis. That is one of the very live questions the Government faces. It probably would not make a lot of sense to try to catch up on that underspend very quickly and then realise there is not enough money to deal with the cost of living. This is one of the things that gives the Government a bit of marginal manoeuvre.

Deputy Pearse Doherty

Large parts of that underspend come in the area of health and recruitment in health, so not trying to catch up causes problems there and accentuates the problems we have.

I believe it was the Institute for Fiscal Studies in Britain that analysed Boris Johnson's measures and suggested that they shielded the most vulnerable by giving the types of payments that were made for those on social welfare payments of £650, an additional £150 for those on disability payments, along with a suite of other measures. Is that the type of approach we should be looking at here?

Mr. Sebastian Barnes

With regard to the balance and the targeting around the welfare system, and also targeting around the tax system, it is important to note that there are people who would not be particularly covered by the welfare system and for whom this is still a major shock. Perhaps this could be thought about more broadly. On the amounts, these are very difficult political decisions to be taken. The council does not have a view on that.

Deputy Pearse Doherty

That is fair enough. In its report, the council does guide us along the way with some of the boxes, including boxes E-1 and E-2 and the impact of inflation on Government revenue. Will Mr. Barnes talk us through, in simple terms, what this means. For example, are the figures in table E-2 the total amount of additional revenue the State is bringing in as a result of the increased inflation that is taking place?

Mr. Sebastian Barnes

People often forget that there is a sort of upside to revenue that comes from higher inflation as well. Obviously, there is a downside from lower activity but there is an upside from higher inflation. This is one of the things that compensates it. Some of those effects would wash out naturally, which means it would increase in line with the economy. In a sense, therefore, there is not a huge gain there. A big issue would be the indexation of the income tax system. We have discussed this before. The income tax system bands are set in cash terms. If one keeps the bands fixed and there is inflation, or wage inflation, then more income is going to move into the higher bands and will be taxed more heavily. Those effects are going to be bigger if wage inflation is higher. There is a potential upside of something that would raise the average tax rate if those nominal bands were kept in the same place. The programme for Government commits to indexation in some form. The Government has factored into its plans a degree of partial indexation, but if one kept that currently planned degree of partial indexation it would not be enough to compensate for the wage inflation that is now expected. As a consequence of that, one would now expect the average tax rate to increase if those amounts that are currently planned are kept there. That would tend to improve the public finances as a whole and improve the budget balance, but the Government spending rule does not take revenue into account so it would not have any counterpart on the other side. This is something we discussed in another box in the report. I believe there is scope for widening the design of that rule, which would actually improve its performance in situations like this.

Deputy Pearse Doherty

Overall, on the basis of no policy change, and given what we were looking at last year compared to now as a result of increased inflation, will Mr. Barnes explain what the numbers in these tables reflect? For example, table E-2 refers to this year's income tax of €1.4 billion, social contributions of €613 million and VAT of €202 million.

Mr. Sebastian Barnes

As Mr. Conroy has just clarified to me, those actually reflect two things: they partly reflect higher inflation and they also reflect some other revisions. This is really the amount the tax revenue has gone up since the budget. On the outlook for tax revenue, the outturns have been very strong in the recovery. This reflects a number of factors. Higher inflation is one of the things that could contribute to that. As we said in a separate paper that came out in the week previous to this fiscal report, we have been surprised - as many people have - by the strength of income tax revenue. We believe quite a bit of this is related to the strength of the high pay-high tax sectors in the economy. There are reasons to believe that this may continue if those sectors continue to do well, but this is also a relatively recent phenomenon so it needs to be treated with some caution as well.

Deputy Pearse Doherty

Are the factors that lead to this €2 billion improvement outlined in table E-1: nominal compensation of employees; nominal personal consumption, which is in the negative territory; nominal building and construction, which as we know is also very high; and the inflation rate? Is it correct to say that it is very much in the area of inflation?

Mr. Sebastian Barnes

It is partly inflation but it is partly the compensation. There is a mixture of factors on these forecasts. Some of it is to do with higher inflation but there is a combination of real and nominal factors. There is an inflation effect in there but there is a bit of a real impact there as well.

Deputy Pearse Doherty

I do not have the reference here, so correct me if I am wrong. In the report the council refers to the measures the Government has introduced since the start of the year which is the €1.1 billion, and then we had the VAT extension, which is about €200 million. The council makes the point that this is less than the bump in tax revenues the State is generating as a result of increased inflation. Is this correct?

Mr. Sebastian Barnes

It is less than the revision in revenue over the same period. Wages have not responded that much to inflation yet so we are not getting that much of that effect coming through in what we have seen already. There are a number of other factors pushing it up. A combination of factors push revenue higher. At the same time, the Government has used more of the contingency than would otherwise have been the case.

Deputy Pearse Doherty

I presume my time is short but I have a final question.

Chairman

The Deputy is well over time.

Deputy Pearse Doherty

I am sorry. My final question relates to the commentary in the report and the analysis on the cost of accommodating Ukrainian refugees. To be fair to the council, there are two things the council has pointed out. The council questions the level of refugee numbers that will come into the State, which had been estimated at an upper level of 100,000 or 80,000 this year. The council also questions the cost of that. Am I right in saying that the cost this year is estimated to be €37,000 per person and next year will be some €30,000 per person, and that this is well out of kilter with European averages?

Has IFAC been able to figure out why the cost estimates from the Department are so high? Of the €2.5 billion outlined in the stability programme update, SPU, for accommodating Ukrainian refugees this year, what would in the council's view be a more realistic range, bearing in mind that none of us know how this is going to pan out? What would help to steer us through this period?

Mr. Sebastian Barnes

I agree the situation is incredibly uncertain. Things have evolved in recent months and can evolve the other way as well. It is difficult to predict. The cost is also difficult to estimate because it depends on the needs of the people involved. We know accommodation is very scarce. It is difficult to know what the solution is. Perhaps Mr. Casey or Ms Holland have additional comments.

Mr. Eddie Casey

We have just started looking at this issue because, thankfully, we have started to get data from the Central Statistics Office, CSO, on claimants who are recently arrived refugees. We can see how much they are drawing in regular welfare supports, child benefit and other assistance payments. We can then guess how much accommodation costs per household. The €3 billion looks to be high but also seems to be an appropriate upper bound on what the cost might be. It would take into consideration that these people might be put into hotels for a long time to come. The reality is there is a risk that could happen. It could be very expensive. If the accommodation costs change because those people are moved to longer term housing solutions, the cost should come down. Accommodation cost is a considerable driver of expense. We are beginning to understand why the costs were put at a high level by international standards. It is reflective of the environment here where there is already pressure on housing, which may push costs higher.

As to what a more reasonable estimate might be, it is too soon to say because the numbers are still rising. Interestingly, the CSO data showed the number of claimants rose to approximately 30,000 and then started to come down again in recent weeks. There might be some initial signs that-----

Deputy Pearse Doherty

Will Mr. Casey repeat that?

Mr. Eddie Casey

Recent data from the CSO show the number of claimants who were refugees rose to approximately 30,000 and then started to decline. That was an interesting finding. It might be that some of those refugees are integrating into working practices and things like that and might not be claiming as much as we thought. It is difficult to see where this will end up because the cost is high compared with other countries and the number of refugees Ireland is expected to receive also seems high, given many of those refugees are settling in communities much closer to Ukraine. There is some reason to suggest the estimate could be a high-ball estimate.

Deputy Richard Boyd Barrett

I thank the representatives of IFAC for their report and contributions. The impact of the inflation crisis has been uneven. Would our guests go even further and say there are winners and losers in this situation? It is not just that the impact is uneven. Would it be fair comment that some people are being hammered while others are doing very well? I would be interested to hear our guests' views on that question. I note that corporate profits and net household wealth are up. Somebody is doing well out of all of this and it is certainly not the majority of low- and middle-income households, who are being hit disproportionately hard, as our guests have alluded to. Even the headline inflation rate does not take into account the hit that low- and middle-income families are taking.

I know IFAC does not get into policy suggestions but one possible approach to dealing with this situation is to insulate people's incomes against the impact of inflation and to do that, if I understood what our guests have said, would cost €700 million. Was that the relevant figure? The problem is that €700 million would take us over the 5% rule. I am generally in favour of insulating people's incomes, wages and so on from the impact of inflation. One approach could be to take money back from those who have benefited from this situation to insulate the losers fully and ensure there are no winners. The Government's mantra is it cannot fully insulate people against the impacts of inflation. That is the Government's view. I do not think that is a statement of fact but is rather a statement of policy. The Government has decided it is not going to insulate people fully from the impact of inflation because the cost would be too high and perhaps it would take us over the 5% rule. The Government could do it if it wanted to. That is a consideration.

Another consideration that is never debated is we should ensure there are no winners. I am not asking our guests to advocate for that position but is it something we might consider as an option? In the current circumstances, no excess profits should be made because that is not fair when the income of other people is being hit. That would be a legitimate policy consideration. Perhaps we might even cap profits. We always talk about capping wages and a need to limit wage increases, social welfare increases and pension increases because the skies might fall on us if we let them rip. The possibility we might cap profits, wealth and very high salaries is never considered. As I said, I am not asking our guests to advocate for that position because I know IFAC does not advocate particular policy measures but is that a legitimate thing to consider in the range of options that is open to the Government? Is it possible for us to consider insulating all the people who are losing as a result of inflation through direct expenditure, income rises or whatever it might be and to ensure there are no winners and nobody is benefiting from this situation?

Mr. Sebastian Barnes

It is a fascinating question that goes to the heart of the issues. IFAC does not take a view on distribution or those kinds of questions. From the point of view of public finances, what is happening to different groups in society is very important because the State, through its policy, is committed to helping some people in society, the less well-off, but does not provide welfare to everyone. That is the basic system. It means that when a shock hits the less well-off, it will cost the Government more and that will have an impact on the public finances. That is where it becomes something about which IFAC would think.

The prices of energy and food, which are largely imported goods, are high. An economics textbook would state that is a situation that does not create winners and losers. We are all losers in some ways because we are having to pay more to foreigners. They gain but we do not gain anything from that situation. There are probably exceptions but the general rule with regard to oil and energy price increases is that everyone is worse off. However, we are not all worse off to the same degree. It matters a lot more to people who have low savings and are struggling than it does to those with higher incomes. That is why support needs to be targeted at those on lower incomes. That shock alone is one that only creates losers. However, there is a question about how one manages-----

Deputy Richard Boyd Barrett

I will pull up Mr. Barnes slightly in that regard. I do not want to have a row with him but that is not the case when some people have surplus wealth to invest in the shares of BP or Shell.

Mr. Sebastian Barnes

As I said, there are exceptions to my textbook story but that is the general principle.

That is why we explicitly say in our report the Government cannot fully compensate everyone, given the country as a whole is worse off. However, it can aim to support some groups. For example, if we were to compensate for the impact of this year's unexpected inflation on public sector pay, welfare rates and pensions, it would cost approximately €2 billion - the €700 million was for one percentage point of inflation, but we have seen a great deal more unexpected inflation than that - to compensate that group fully and no one else would get anything. We can compensate the more vulnerable groups at a cost that is sustainable to society, particularly if we do not provide untargeted help to those who do not need it.

There is another point that is important to understand, and it is somewhat specific to Ireland. We are suffering from higher energy and food prices like everyone else, but we are also benefiting - or, rather, some people are - from a favourable shock to digital and pharmaceutical activities and financial services. Something we explored in the analytical note that was published last week by our economist, Mr. Kevin Timoney, is that wages in those sectors have been growing at a fast clip for a number of years and employment therein has increased a great deal. People within Ireland who happen to work in those sectors or benefit from their spillovers are doing relatively well. That is good for tax revenue, but another group is being hit by the food and energy price shock. This is where choices have to be made - they are inherently political choices - between how these different pieces are put together to achieve the outcome people want.

Deputy Richard Boyd Barrett

These are legitimate considerations.

Mr. Sebastian Barnes

Regarding the public finances, and from the narrow sustainable economic management point of view, these are the major choices the political system has to make. They have to be economically and fiscally sustainable. They are not choices about which the council can advise the political system. We can just lay out what we believe they are. The system can choose to go about this in different ways, but it is for the democratic system to decide how the balances are struck. They are difficult balances to achieve, especially given higher import prices mean there is a loss to the country as a whole. We have to decide who is going to bear that loss. It is a difficult choice.

Deputy Richard Boyd Barrett

We have expanded the amount of renewable energy being produced. We are still dependent on imports and, therefore, vulnerable to price shocks resulting from international factors, but we use a great deal more domestically produced wind energy than we used to. Why has it made not a blind bit of difference to the price of energy?

Ms Dawn Holland

That is a good question. It is a long transition. Petrol is another significant factor. The process towards electrification of the transport sector is progressing more slowly than the transition of electricity towards renewable sources. That is one side of the story.

Deputy Richard Boyd Barrett

Regardless of how much we have expanded our domestic renewable energy production, there is no sign it has made any difference. One would have expected it to have had some impact, but it has had none at all.

Mr. Sebastian Barnes

As the Deputy will see from the looks on our faces, we are not experts in energy economics. I suspect the answer is it has probably made some difference, but not enough because we have not gone that far down the transition path. In some markets, the price is set at the marginal production price, which is often gas, and not on the cost of production of other sorts. That is how markets work. In a situation like this, it is the price of the marginal gas production that is setting the price of electricity across the whole market, not the price of production of some of the elements that are produced inframarginally, that is, produced at a lower cost. This is an issue in many energy markets. It is a major issue in France, where most electricity production is nuclear, which is relatively cheap, but prices have still increased because the marginal electricity producer is a gas producer.

Deputy Richard Boyd Barrett

It is interesting that this is the case. The mantra is we will solve the current problem. Actually, the Taoiseach is saying we are entering an era of high energy prices and that the inflation we are seeing currently will be around for quite a while. Simultaneously, people are saying that, if we wean ourselves off fossil fuels and dramatically expand domestic renewable energy production, we can deal with that problem in the medium term.

Mr. Sebastian Barnes

It is a problem of horizons. In the short run, we have the energy system we have and we are facing the consequences of that. In the long run, the move towards electricity and renewables will be a major change, not just in the way we produce energy but in the way the whole economy works. We will not be importing anywhere near as much energy as we were beforehand because it will be produced domestically. This will make the economy more resilient because we will be more dependent on domestic supply. Unfortunately, that is a long way off.

Chairman

I thank Deputy Boyd Barrett. For a second, I thought he might conclude before his time was up. I might have won a bet.

Deputy Richard Boyd Barrett

I was shorter than Deputy Doherty.

Deputy Seán Canney

I will start with Mr. Barnes's final point about getting to a stage where we would not be importing any energy. It is a long way off. From reading the submission, the council is concerned we have not factored in the transition to a green economy. By not doing that, are we moving further away from making our dream of becoming energy self-sufficient and secure a reality? I am seeking Mr. Barnes's opinion. If I were Minister for Finance, should I be directing money towards the transition to secure the future? Perhaps he will comment on this first question, after which I will discuss a few other points.

Mr. Sebastian Barnes

The Government has set clear climate change objectives. There are a number of issues the Climate Change Advisory Council and others have raised concerning the extent to which the Government has policies that would support reaching those objectives. A report published today suggested there were still some gaps in the policies required to meet the objectives.

Another challenge, and the one we would focus on the most as the fiscal council, is that there is no assessment of the economic and budgetary costs of that change. Much of the investment in the national development plan would go a long way towards meeting the Government’s objectives, so that is probably okay, but we have more concerns about ongoing current spending needs in climate change. The Government is also facing a potentially large loss of revenue. It raises a great deal of money from taxes on petrol and diesel. As people move towards electric cars, it will lose that money because electricity is taxed much more lightly.

Deputy Richard Boyd Barrett

Watch those taxes increase.

Mr. Sebastian Barnes

There are major issues about how it all fits together. It is a significant concern.

The council is a member of a European network of fiscal institutions and we have undertaken a survey to determine what the state-of-the-art is in Europe. One or two countries are strong in this area. For example, the UK and the Netherlands have performed proper assessments. Most other countries are in the same boat as us, with their governments falling behind in terms of starting to figure out the implications. It should be a major priority for the Government to understand the full economic and budgetary impacts of this major re-engineering of our whole society. We need to figure out what the impact will be on the public finances.

If it is going to cost a lot of money, we must start thinking about how it is going to be funded and how the public finances are going to be maintained in a situation where we will be facing significant costs relating to climate change.

Deputy Seán Canney

I thank Mr. Barnes. I meant to say at the start that I was watching these proceedings in my room but that the Internet connection was a bit flaky. It was going in and out. I decided to come down and join the party here. Not the political party.

When we talk about changes in this context, I was in an electric car last night. The tax on it is €90. I guess the tax on that type of car will go up as the cars powered by diesel and petrol leave the roads. Another area where there is a conflict of interest concerns the context of hyperinflation and the necessity of supporting people on fixed incomes. We will have to support people who have disabilities. Additionally, we will have to increase support for those people and not just keep it in line with inflation. I say that because we can already see from the reports done that people with disabilities have additional costs to bear just to live. I refer to how we can address this aspect and how we can keep those supports in line with inflation. Equally, we also have people who are working and contributing to society. I refer to the cost of travelling to work for the many people with no access to public transport. Public transport is probably now being subsidised more and that is benefiting some people because of a reduction in rates, while other people who have no access to public transport must use their own vehicles to go to work and are facing greater costs as a result.

We can see a differential emerging before our eyes. How do we balance this situation? Let us take people who have mortgages as well and consider the rise expected in interest rates and the resultant increase in the costs of mortgages for working people. How can we best address this type of situation? Is it through additional tax reliefs to help people to pay their mortgages? We are trying to do everything for everybody. Where does Mr. Barnes perceive the challenges will be in this regard? What impact will this situation have on the budget for this year and for those in the following four to five years?

Mr. Sebastian Barnes

This is the key issue now. The Deputy is right about the cost of supporting vulnerable households. He has given a good sense of the many challenges existing in society. The cost of supporting the most vulnerable groups and households, including those with the lowest incomes and those with various challenges in their lives is going to increase and this is what the Government needs to manage. So far, it has mostly focused on temporary measures that may be warranted because the increase in this regard that has brought about higher energy prices has been relatively recent. Eventually, over time, it would be natural for welfare rates to increase and for supports to be adjusted in the way referred to.

An important point, is that the Government cannot help everyone in this situation. That would not be a sustainable approach and it would not make sense. The Government, as we have said, is facing this balancing act between protecting the economy and protecting those groups that are vulnerable and not putting a great deal more money into the economy when inflation is already high and demand is strong. The best way of doing this is by targeting such protections at those who are the most vulnerable. A big challenge politically is that a wide section of the population is under some pressure because of these energy and food prices. It can be hard to target protections in this kind of environment, because some people will not benefit much or at all from Government measures if they are targeted. It is a challenge for the Government to communicate information on this scenario and then to calibrate its response.

Deputy Seán Canney

Following on from that point, let us take the working person and public sector pay. When we had increases in public sector pay back in the champagne days, those were blamed for causing significant inflation and for a recession. There is an expectation that public sector pay will have to rise to take care of and try to compensate people for the hyperinflation we have now. Does Mr. Barnes see public sector pay as a topic that might be fraught with danger regarding how we approach it? Are we potentially going to add more money to the fire of inflation? What is Mr. Barnes' opinion in this regard?

Mr. Sebastian Barnes

This is an area where, again, a difficult balance must be struck in the current circumstances. Public sector pay rates were set with a view that inflation was going to be much lower than it turned out to be. It would be natural that there would be some reflection of this. It is, however, also an area in respect of which the Government will have to strike a balance. Some people in the public sector are highly paid, while others are on much lower incomes. This is also an area where some discussion with the private sector would be helpful, as would thinking about how this matter intersects with welfare rates and other things. If we are trying to decide how we are going to manage this as a country, then we will need to think about how all these pieces will fit together.

Deputy Seán Canney

Turning to tax revenues and the imbalance we have with corporate tax collection in this regard, does Mr. Barnes see the aspiration to continue to grow the numbers in work as a counterbalance for drawing in tax revenues that would be more stable? How can we address our reliance on corporate tax revenue in the context of running the country? I ask this because the current situation is not sustainable.

Mr. Sebastian Barnes

The over-reliance, in our assessment, on corporate tax receipts is a major concern. They have increased greatly and rapidly in recent years and come mostly from a small number of multinational companies. If we were to unwind our dependence on this source of revenue, at least partially, as we suggest in this report, that would mean finding the money elsewhere. There are various margins of adjustment in respect of where we could do that, as the Deputy suggested. Growth may be one of them, but that is a difficult thing for the Government to control. Other areas would include raising other forms of taxes or exploring the composition of spending in other respects. Finding alternative sources of revenue will be important. One issue to consider is that we are benefiting as well from strong income tax receipts from workers who are highly paid and highly taxed. Many of them are also working in the same corporate sectors in this context and that means our vulnerability is higher than would be suggested just by looking at the corporation tax levels.

Deputy Seán Canney

Would it be wise for us to be taking some of those corporation tax revenues and banking them away as a fund for a rainy day and as a safeguard in the context of future events?

Mr. Sebastian Barnes

That would be very wise indeed.

Chairman

I call Deputy Michael Healy-Rae next.

Deputy Michael Healy-Rae

I apologise if I dipped out before; my connection has been coming in and out. I thank Mr. Barnes and all the witnesses for being here because this is an important engagement. I thought it was ironic this morning, at a time when inflation stood at 8.2% in May and there is all this energy insecurity and fuel uncertainty in respect of cost and availability, that the news headlines focused on how we are going to achieve our climate action targets for 2030. I refer to us being beaten into submission in the context where, whatever else might happen, it is necessary to achieve those targets at whatever cost that may entail. People were being interviewed and giving their viewpoints on this subject in respect of the full enormity of what this endeavour is going to cost not yet having been realised. I was thinking of someone having porridge, perhaps choking on hearing those comments this morning, and wondering if these headlines were really coming at this time.

I preface all I am saying by stating that I have as much, and maybe more, of a concern about the environment as anybody else. I am not a climate change denier, but I am a realist. I live in the real world of representing people, many of whom live in rural locations and must travel to work at enormous cost. Their children must also be transported to schools. These people are living in rural locations as they are perfectly entitled to do. As I have always said, whether people are living in Blackrock, Ballinskelligs, Templenoe or here in any part of the centre of Dublin city, they are entitled to live where they and their families wish to be.

How sensible is it to be in the Dáil one day imposing taxes upon taxes in the name of trying to reduce our carbon emissions while at the same time telling people they have to suck it up? The Government is also saying we must introduce measures to take the bite out of this harsh financial reality and so far all it has come up with is a reduction in the price of fuel, which actually went up on the two nights previous to the deduction. It went up more on the Sunday and Monday than it came down on the Tuesday. There was also the famous €200 in respect of electricity. I can tell the Government that is well forgotten now because the prices people are paying on their fuel and energy bills are astronomical. There are also issues around energy insecurity because the Government did not have the gumption to go ahead with an liquefied natural gas facility in the Shannon Estuary. Any of the decisions it has taken so far have resulted in us being overly reliant on importing our energy from England and France. That is going to lead us to-----

(Interruptions).

Deputy Michael Healy-Rae

We will call it the dream of reaching our targets by 2030 in the interim, and out to 2050. Is this a dream or is the reality really a nightmare? We will not be able to do it. If we try to continue, we are going to break people completely and put them in a position where they quite simply will not be able to afford to pay their bills, run their households, educate their children or do the basic day-to-day living they need to do. That is a real worry. The Taoiseach said yesterday we were in unprecedented times. Due to the cut-off from Russian oil, we are going to have 90% less oil coming into the European Union than we would have had before. The reality of that has not been thought through at all yet. Where is it going to leave us? Where is it going to leave the people we represent? They would have choked on their porridge this morning on hearing that even if we implement everything it looks like we are not going to hit our targets, so we are now going to have to squeeze the noose a bit more and increase carbon taxes more and more. Surely this is a time when we should be saying that we have to live for now and trying to make it possible, plausible and feasible for people to live now, rather than being so obsessive about putting more carbon taxes on people.

Mr. Sebastian Barnes

The Deputy raised many different issues there. The core of the issue is that the climate transition is, even without the war in Ukraine, a very complicated and challenging undertaking. As we have emphasised, it requires a huge re-engineering of our society in many ways. It is not just about changing the energy mix. It is a very deep change to the way the economy functions and the way society functions. On top of that, there is the war in Ukraine. In some ways, the war has had some of the same effects that meeting emissions targets would have had, in terms of having to change and move away from fossil fuels and things, but it is happening far more quickly and in a far more unstructured way than we had planned. It underlines the fact that we ultimately need to take a steady approach towards tackling climate change but in the short run there may be some more urgent imperatives, which means some slightly different actions will have to be taken than would otherwise have been the case.

What the Deputy said also highlights some of the issues we will face with climate transition. One issue is higher energy prices, which are today caused by Ukraine but may ultimately be caused by the phasing out of fossil fuels. How we manage the social aspects of that is important. Relatively wealthy households are probably in a better position to manage that transition than lower-income households, partly because they spend less of their money on food and energy but also because they have more savings. They are in a much better position to deal with most problems. We did not mention this in our earlier answer but the Government needs to start thinking about what the social implications of the climate transition will be in the long term and how it is going to manage that. That is one of the big fiscal costs. For example, the evaluation that was done in the Netherlands of the economic impact of their climate change package put a lot of emphasis on the fact the Government was going to have to compensate some groups in society or provide more help for them to transition. For someone who is relatively wealthy, it may be not so difficult to manage investing in a heat pump and insulation but for someone on a much lower income, undertaking that kind of investment, which will pay back over quite a long period, is going to be much more challenging financially. The Government has to think about the social implications of that. Good planning, both on the climate side and with regard to the economic and social implications, will help make the transition as smooth and fair as it can be.

Deputy Michael Healy-Rae

I thank the witnesses.

Deputy Mairéad Farrell

I, too, was trying to use the Internet but it was not working. I thank the witnesses for coming in. Although I have meetings with them online, as someone who was elected just before Covid, I think this is my first time seeing them in person. It is nice to meet them in person. I have a few questions prepared but I am also interested in some things that arose during the discussion. I am sure the witnesses are more aware of this than I am but I have noticed a particular issue in the media. There is one thing that is thrown out there but you almost cannot discuss it. Deputy Canney referred to wage increases and the impact they will have. I have noticed that in a lot of commentary, both within the Dáil and in the media, as soon as any kind of increase in wages is mentioned, people say wage prices will spiral and increase inflation. I would be interested in the witnesses' views on the concept of the wage-price spiral. Where do we need to be at in order for that to happen? The factors causing inflation are energy prices and supply chain issues. A few weeks or months back, there was a graph in the Financial Times which showed that since 2020, wages in the eurozone did not really increase so that has not been the cause of inflation. I would be interested in the witnesses' views on that. Sometimes we have a very closed conversation nationally on certain topics. People are struggling. I have my own views on the matter but I would be interested in what the witnesses have to say.

Mr. Sebastian Barnes

It is a genuinely complicated question, partly because we have not had inflation like this for a generation. Many things have changed in between. We do not really know what it will be like in the current environment or how people will respond. A lot of it ultimately comes down to human behaviour and expectations and things that are very hard to get to the bottom of. There are two channels through which wages would be increasing. As we have seen, since the onset of the pandemic there are labour shortages in some sectors. That would naturally bid up the wages. That is more like a conventional overheating but it is relative to some sectors, including construction and areas like that. A special feature in the Irish case is that there are some sectors linked to the digital and pharmaceutical industries, which have very high wage growth for reasons that are totally unrelated. It is really to do with global factors. That is a permanent increase but it means the average wage rate does not mean very much because it is a combination of all sorts of different wage rates at totally different levels and with totally different growth rates. It is a very hard thing to think about.

We have already produced a note on the matter, but it is something we are thinking about much harder because it is becoming a big reality for the Government.

When people set their wages, they may anticipate a level of inflation and want to be compensated for that. The question is what level they anticipate. If they think everyone else is going to raise their wages, and by consequence companies also raise their prices, they will ask for more. We do not want to be in the environment where everybody is bidding up relative to everyone else because there will just be higher inflation. That will not really achieve very much and it means there will be higher inflation just to stand still, in a sense.

A big question for Ireland is also what happens relative to other countries. If other countries in the eurozone have the common currency, we need, in a way, to keep an eye on what is happening in those countries. If they did not raise their wages very much and we raised ours by a lot, our relative prices would increase by a lot and we would lose competitiveness. We also need to look at that fairly carefully.

In terms of what this means, as we said earlier, this is an energy price shock and it is imported goods that have increased so we cannot fully compensate that through wages for everyone. We would just lose our competitiveness if we did so.

Deputy Mairéad Farrell

As soon as we mention anything about wages increasing, the immediate argument for shutting it down is that it will drive inflation. Is that shutting down such increases fully or partially?

Mr. Sebastian Barnes

In the report, we are careful not to use the wage spiral language at every turn. It is a risk but exactly where to set wages is a really difficult judgment and we are not in position to have a strong view on that. Being fully compensated for inflation would lead to risks of even higher inflation, which would likely be self-defeating. Exactly where on the spectrum it is put would be a difficult judgment. It partly depends on what one might think would have happened otherwise as well in the sense that people would have otherwise got some wage increase anyway. There are some sectors that have relatively high productivity growth or there is a shortage of labour, so it is pretty hard to know how all of that fits together.

Deputy Mairéad Farrell

We were talking about the report today about climate targets and there was mention of the projects in the national development plan, NDP, being delivered. We have seen the initiation of the inflation co-operation framework but these are huge amounts of money and we do not know how inflation is going to go over the next while, as we mentioned. Does the council have any concerns about the delivery of the NDP or will the witnesses comment on that?

Mr. Eddie Casey

Yes, to be frank. We know there is a certain budget and there are so many projects but we do not know all the detail about every single project because it is massive. The capital plan was not that detailed in terms of economics, including specific programmes, their impact on the economy and the like. That speaks to one of the problems we have in general, which is that we do not know what climate initiatives will cost and where the fiscal costs will be.

When we start to see costs rising for each capital project, given the rise in construction and material costs and labour, it will have an impact on when projects can be delivered. It will potentially squeeze out some of the projects that are there but, on the other hand, we have already seen some delays in projects getting off the ground. It is still possible that projects could be delivered but at a later date. Again, this is a complex backdrop to all of this. We could see the projects delivered on a later timeline.

Deputy Mairéad Farrell

I hope we will see them delivered. The report references the topic of the day, which is the rise in energy prices we are all talking about. Is there a prediction now that the energy crisis will lead to permanently elevated costs compared with the pre-Covid price trajectory? I only have two minutes left in my slot so what is the assessment of the witnesses of such a view? Do they expect fossil fuel energy prices to remain high throughout the decade relative to pre-Covid expectations? Has a floor on the price of carbon been cemented by these new dynamics?

Ms Dawn Holland

Looking the futures markets, fossil fuel prices are expected to come down over the near term. That said, they have stayed higher for longer than expected. With some of the most recent sanction announcements, etc., they are likely to remain high in the near term. That is probably longer than we had expected before. With this in mind and moving towards the climate policies, which as the Deputy has said will put a sort of floor on the carbon price, it is very difficult to forecast what will happen in energy markets. As a result, betting on the outcome is the wrong approach, but having them stay higher than we anticipated three years ago is probably plausible.

Deputy Mairéad Farrell

That cements a floor on the price of carbon.

Ms Dawn Holland

It does a bit of the work that might have been needed by putting an explicit price on the carbon.

Deputy Bernard J. Durkan

The history of inflation in this country is peculiar, I think. Sometimes we can see what is causing it and sometimes we cannot. Currently, there is a war ongoing and inflation is inevitable. It is the reason for it now but it is not always the reason, unfortunately. Are there reasons given for the inflation that may not be a contributor but which may suit to explain away such inflation? I feel there are, although I may be answering my own question.

Chairman

A vote has been called in the Dáil but Mr. Barnes may answer the question.

Mr. Sebastian Barnes

In terms of reasons for inflation, there are a number of factors. Inflation was incredibly low in the pre-pandemic period, averaging 0.5% per year. It was already starting to creep up through the end of the pandemic, partly because of a shift from services to goods, which put up some goods prices. This was exemplified in construction. We also saw labour shortages and as businesses reopened, some prices were going up.

The real driver to these sorts of levels can be clearly seen as the contribution of energy and, to a degree, food prices. In the months ahead we can probably expect to see it showing more in other prices. Other items that are not explicitly energy and food contain inputs from the energy sectors and we can see that in the euro area inflation, services are starting to play a bit more of a role. These are services from areas that are very energy-intensive, such as transport.

The big question after that is what will happen next. The Stability Programme Update 2022 assumes that oil and energy prices will stay at the same level and one would expect those components to disappear and inflation to come back, at some point, towards a more normal level. The programme update assumes it will go back to approximately 2%, which is the ECB target, although we have not been there for a long time now. There is much uncertainty around that, including how long the immediate knock-on effects will last. It partly depends on policy as to whether inflation will really take off or we will get second-round effects, etc. There is massive uncertainty, but what we see now is very clearly related to energy and food, essentially, along with rents and so on.

Chairman

A vote has been called.

I propose we suspend the meeting for 15 minutes. We will regroup after the vote has been taken.

Sitting suspended at 6.49 p.m. and resumed at 7.05 p.m.

Chairman

The meeting is back in public session. I thank everybody for their forbearance. It can be tricky when there is a vote in the House. Deputy Durkan still has eight minutes left in his allotted time.

Deputy Bernard J. Durkan

I was getting an answer on the energy and other issues. I contend that the European Union has been largely negligent in dealing with the energy issue. It had all the time in recent years to make provision, and it should have been able to make provision, knowing what the prevailing opinion was regarding the origins of energy from the point of view of the countries in central Europe. Are we likely to see any improvement soon in respect of that sourcing of energy?

Mr. Sebastian Barnes

One thing that is very important with regard to the EU policy, which is also very important in the energy market, is an assumption of the stability programme update, SPU, forecast that, essentially, the EU's energy plans, particularly over next winter, will work effectively and that the different margins that are allowed to compensate for reduced supply of oil and gas from Russia are effective. There are obviously many risks around that and a lot of things could go wrong. That could potentially lead to quite a difficult winter in Europe. Ireland is not directly exposed to that as strongly as some other countries. In particular, our industrial production is not as strongly dependent on that as industrial production is in some other countries. However, that is a big risk to the European economy for next winter and, as a consequence, it is also a risk for the Irish economy. Further ahead, many of the measures that have been announced would contribute to moving towards achieving the climate change goals and going in the right direction, so ultimately it would be helpful if all of that happens. It also would be helpful for the public finances. In the short term, however, those risks are important. It is one of the big downside risks facing the economy.

Deputy Bernard J. Durkan

I am also concerned about food availability, food shortages and interjections in the food markets by various ways and means. There is going to be downward pressure in this country in respect of emissions, and I accept we must deal with that. Some of it can be dealt with indirectly and some of it can be dealt with directly by taking steps. However, we also have to be careful we do not end up with a food shortage. A food shortage can develop very quickly. It can come upon us in a very short space of time. For example, there was a serious food shortage in Syria some years ago, in many ways because of the war. Are we capable of withstanding all the pressures that are likely to be in our face, as it were, and come through that from the point of view of the food supply chain?

Mr. Sebastian Barnes

This is one of the areas of risk. Internationally, the risk of food shortages is a serious concern, especially for lower income countries and those that are very dependent on importing directly from Ukraine and Russia. In the Irish context, the biggest risk is probably more food price inflation, both because of the shortage of food but also, for example, due to the fact that fertiliser prices have increased a great deal. It is mostly an inflation risk in the Irish context, but it is a risk that would not be borne equally by all households. There are things to consider there in terms of lower income and more vulnerable households.

Deputy Bernard J. Durkan

I am thinking about inflation in the past and how it affected the economy.

The tendency in the past was to follow the inflation by offering supports of one kind or another. That did not finish up well in times past. What is the balance to be struck in that area? Are we capable of being discreet in what we do and prepared to be so? Alternatively, are we likely to go overboard?

Mr. Sebastian Barnes

I agree with the Deputy that, given these are the highest inflation rates we have had in a generation, we have to go back in time or to countries that have experienced high inflation more recently to try to draw lessons. Many things have changed in the economy over time, which is one of the things that makes it uncertain. We are in some senses in uncharted waters. A clear lesson is that trying to overdo the response and insulate ourselves from these shocks will lead to higher inflation and second-round effects. How far those go depends on many things.

One thing that has changed significantly is the way monetary policy works. We now have an independent central bank in the euro area, which one would expect to take this very seriously. That is one of the reasons interest rates have increased: people expect the ECB to respond and it has indicated it will start to raise interest rates in the next couple of months. That is different from the picture we had six months ago. That is one of the forces one would expect to keep inflation down. The higher it sees inflation going, the stronger it is likely to respond. That is one reason it would be counterproductive to have excessive across-the-board wage increases.

There is a delicate balance for the Government to strike. There is a legitimate case for protecting the economy in the short run and for helping lower income and more vulnerable households, but a balance has to be struck with not putting too much money into the economy or creating unsustainable wage and price expectations. It is a difficult balance and there is no magic formula to do it. In the early days of social partnership, Ireland was able to use different instruments together and co-ordinate different parts of the economy to achieve an outcome. It is a different situation today but that process worked quite well. Like many countries, we have not needed those processes to the same extent for a long time. The question is, if we come back to them, how we will do it. The Government has said it is having discussions with different bodies and that could be a good way of managing this.

Deputy Bernard J. Durkan

Unfortunately, one of the slogans used to be "We will put more money in people's pockets". That was when governments were always going to address issues of a long-term or short-term nature. The worrying part was that when they got their hands in people's pockets, they had a habit of taking more out than they were putting in.

We have to recognise that there may be, as the Taoiseach warned, a short, sharp pain. How we deal with that remains to be seen but I hope we hold our nerve.

We are deemed to be one of the five wealthiest countries in the world. That is what I hear the Opposition telling us, anyway, all the time. I have my doubts about that because most of our wealth comes from wages and salaries and property prices. That still remains, I think. I will not ask Mr. Barnes to comment on putting the hand in the pocket but would be grateful for his response on the rest of it.

Mr. Sebastian Barnes

Actually, I did want to comment on that. It speaks to an important issue, which is that we have to tackle both the short-run challenges around the cost of living and the longer run challenges we have talked about, such as an excessive reliance on corporation tax; climate change; pensions, which we have not mentioned much; and rising healthcare costs. We need to tackle all these things while maintaining the economy and public finances on a sustainable path. The Government's 5% rule provides useful guidance in this context, keeping Government spending in line with the underlying potential of the economy. The flip side of that is that choices have to be made between different things because we cannot keep putting money in the pocket without saying where it will come from.

On costs, this high-cost environment highlights the contribution of domestic factors to high inflation or the high cost of living. Housing is an issue we are aware of, and there are a number of other things. There are other ways of bringing down the cost of living by tackling some of the structural reasons some things are expensive in this country. Maybe those become more important as inflation goes up for other reasons.

Deputy Patricia Ryan

I thank Mr. Barnes and his colleagues for being here. We may be one of the richest countries but we have an awful lot of poor people in it. The council's report references the Pensions Commission projecting a €13 billion shortfall in funding for pensions in 2050. What is the best way to address this in the absence of raising the retirement age?

Mr. Sebastian Barnes

The Pensions Commission did much good work. We also produced our long-term sustainability report two years ago. An important message from that report is that tackling these problems earlier makes it less expensive and gives a better range of choices than tackling them later. That is a case for addressing these issues in a timely way and that is why we highlighted the fact there is as yet no response to the Pensions Commission's proposals. It is ultimately a political choice. There are a number of options: raise the pension age, raise contributions or lower benefits. Those are political choices and I am not taking a view between them. Probably, given the size of the challenge, you need to do a combination of those things. The Pensions Commission recommended eventually linking the retirement age to life expectancy, which would help to reduce costs, and fairly significant increases in PRSI contributions. The Government has to decide which of those channels it will take.

There are two driving factors which are important. One is the population. People are living longer. Life expectancy aged 65 is increasing quite a bit. The time people can expect to spend in retirement is going up and we are having a more generous pension system. That would stop if we started to index it as the Pensions Commission suggests, but we are making the pension system more generous as we go. The other factor, which is less well understood, is that the number of people reaching retirement age will increase by 50% between now and 2050. These big baby boom-type generations are reaching retirement. That is where most of the cost increase is coming from. That is why we probably need a combination of the two. In the Pensions Commission proposals, the life expectancy increase deals with that piece and the tax part deals with the rest. There may be a case for increasing the taxes earlier because those people are working now so the tax base is bigger than it will be in the future. Taking early action is warranted.

Deputy Patricia Ryan

Is there any method to the madness of the Government's waiting until October to address the cost of living? Deputy Doherty may have asked something similar around this, but we are in a massive cost-of-living crisis. Should the action be taken more seriously? Will the council outline how best to approach mitigating the impact of inflation on households while avoiding additional inflationary pressures?

Mr. Sebastian Barnes

There are two issues. The Government has introduced a number of largely temporary but untargeted measures and packages. Those measures are sizable so the increase the Government has made is about the same size as the welfare package in the budget last year. It is not a negligible measure. Members can discuss whether it is enough.

On timing, the council does not have a view as to when additional measures should be announced. Some of the current measures expire in October, so that is a natural point for the Government to consider it. The summer months are easier because people are not having to pay for heating to the same extent. The council really has no view on that. It is a judgment the Government has to make. It is a democratic decision.

As to how to do it, which is a different question, it is about trying to target that help more than it has been targeted thus far. We are trying to get the balance between helping the most vulnerable people and not putting too much money into the economy at a time when inflation is already high.

Obviously the best way of doing that is taking a given amount and targeting it at the people who need it most. That could be done with measures more tied to the welfare system. It could also be done with measures related to the tax system because some of the people who are having a significant impact would not be covered by the welfare system. There are a number of things for the Government to do. It might need to be a bit creative in the way in which it does them. We also know there is a rural-urban difference. Pensioners, especially in the winter, tend to spend much more on heating as a share of their incomes. There is a lot here and there are not necessarily perfect ways of doing it. It is for the Government to come up with a way of achieving that.

Deputy Patricia Ryan

I am a spokesperson for older people and I have concerns around pension-age people in terms of food or fuel at this point. It is getting out of hand. We have many people coming through the doors of our office with those problems. The Irish Fiscal Advisory Council mentions the rainy day quite a bit in its report. What does the council feel is the best approach to a rainy-day fund in terms of its structure? How is it funded and what would it be used for?

Mr. Sebastian Barnes

The question about the structure of the rainy-day fund is a very good one. The Government set up a rainy-day fund. It made some contributions but delayed them and essentially made very few before the pandemic. It does not currently plan to contribute. We think that is very useful. The Irish economy is inherently quite volatile. We are very reliant on corporation tax and all sorts of changes in the global economy. It is good to have a precautionary fund available. The other issue is that we have become very reliant on these excess corporation tax receipts. A good idea would be to reduce the extent to which spending relies on excess corporation tax.

It raises the question of what to do with the money. One option is to use it to pay down debt. Another option is to use it to build up the rainy-day fund. We have some concerns about the way the Government set up the rainy-day fund. Under the current EU rules, in particular, it is quite hard to draw money down from the rainy-day fund. The design the Government chose did not seem to address that very well. It is an issue to which the Government should return. It should look at the design because the fund could be improved in order for it to have a much better stabilisation role in the economy than is currently the case.

Mr. Sebastian Barnes

That was leading on to my next question. I would have asked what was the best way to address the over-reliance on our corporation tax. I suppose that is kind of self-explanatory.

Mr. Sebastian Barnes

The rainy-day fund.

Deputy Patricia Ryan

Yes. I will finish up by asking the council's view on changing VAT rates both in general and with regard to the reduced rate for the hospitality sector. What would be its effect on inflation versus the benefits? Would there be any unforeseen consequences of that?

Mr. Sebastian Barnes

One thing about the VAT rate cut is that it is temporary. That is very important for the public finances. The Government was running a deficit of more than 9% of national income during the pandemic, mostly due to temporary measures. Now that those have unwound, the public finances are in much better shape. That shows one can have big temporary stimuli without driving the public finances massively off track though, of course, we accumulated that amount of debt, rather than permanent measures. That is why this distinction is also a little bit important with the cost-of-living measures. Maybe energy prices fall at some point and temporary measures to smooth over that increase may be the appropriate thing to do. With regard to the VAT cut for the hospitality sector, the council does not look at these kinds of specific measures. Economists are often quite sceptical about those measures - how much they actually deliver and how much they reduce prices by, as compared to boosting the cash flow of those firms. In some cases, as during the pandemic, cash flow was the issue, but we are now in a different situation. We know the economy has recovered quite strongly. However that is not something we have looked at in any detail.

Chairman

I will allow members to come in with other questions. I ask members participating online to raise their hand. We talked a little bit about debt. Can we expand on that? Obviously we are in an especially volatile global situation right now. I notice that some of the language in the council's submission is similar to the language at which we have been looking for two years insofar as it is a good idea to reduce our debt. We have relatively high debt compared to international comparisons. Since I am looking at vaguely similar language, has the situation changed? We are possibly looking at different interest rates and a changed global environment. Should we be considering our national debt differently now?

Mr. Sebastian Barnes

The forecast for debt has changed quite a bit. It has changed essentially because the economy has recovered much faster. High inflation tends to reduce that debt ratio. The other big thing that has changed is the budget balance which now looks much healthier than we thought before. That is what is putting it on this downward trajectory. Another thing that has changed which goes in the other direction is that we have seen interest rates go up a lot. At one point, Ireland was paying zero. It is now more like 1.5%. It is a big change at the margin.

In the short run, we are relatively well protected because Government debt has been issued at relatively long maturities and the Government is holding quite large cash balances. That was done for precautionary reasons but it is actually quite a good idea because it has locked in low interest rates. It has pre-funded that. The strategy has arguably paid off. Eventually, however, we will have to roll that debt over and we will go from the situation we will have in the next couple of years where interest costs will fall, because the debt we are issuing is still likely to be at lower interest rates than the debt it is replacing. That dynamic will go into reverse in the medium term. The debt outlook has changed quite a lot. The change has been partly favourable and partly less favourable.

In terms of the trajectory, the concern is that debt is still at a relatively high level compared to many countries and compared to what it has been historically. We have just discussed all the pressures on the cost of living and the risks. If those risks were to materialise and there was to be a big global recession in which Ireland was be hit badly, we would be in a different situation. However, in an SPU scenario where we come to growth and inflation comes back under control, the years ahead will actually be quite favourable. Unemployment will be quite low, the economy will be growing quite fast in real terms and interest rates will still be very low. I will borrow the phrase about fixing the roof while the sun is still shining. Those will actually be quite good years. They are not amazing years but they will be relatively good. Reducing public debt is a very difficult exercise. One wants to do it in relatively favourable circumstances such as that. One does not want to be doing it in a position where the economy is growing much more slowly which, in the long run, may well be what happens in Ireland or where one has major economic problems. It is very much about taking the opportunities.

The policy mistake of most advanced countries over past decades has been not to take the opportunities. When a country comes out of a recession or a slowdown, there are always problems to deal with. The country says it will do it, but not now. The country understands it needs to do it, but it will not do it now. One sees that the debt goes up during every crisis. It stabilises after the crisis for a bit and then we have another crisis. One is basically going up an escalator. This is really happening because of the failure to take slightly courageous decisions in relatively good times in the economy to get debt down. If we want to avoid being caught in this trap or being in a situation that is worse where one has to reduce debt against a difficult background, this is why we should make this plan.

Of course, if the economy were to go sour, we would need to look at it differently but that is basically the reason that remains a priority despite all of the other challenges. That is why we think sticking to the 5% rule would be helpful in that context. Of course, that imposes choices, but it imposes exactly the choices one should be making. If we want better public services or if we want to fund climate change, how will we pay for it? We should not think we will borrow. There may be cases in which it may be reasonable to do so, but we should not just do that because we are reluctant to face up to the fact that we should just be paying more or finding some savings elsewhere.

Chairman

That is a very helpful answer. I am aware that some countries are dealing with an issue around access to cash. I notice that some of the council's work is based on looking at ATM transactions. There seems to have been a transfer of access to cash facilities from banks to private companies. In terms of access to data, how happy is the council with the idea that transactions such as that are a good basis for data? Does the council see the beginnings of any sign around access-to-cash issues in Ireland?

Mr. Eddie Casey

I am definitely not an expert in this. We have recently been using the cards and ATM data to really understand in granular detail what is happening on a day-to-day basis in the economy and what is happening with consumer spending. It has proven really useful. It is a brilliant resource that the Central Bank has started to produce. It gets those data from banks. It gives a very clear read of how consumers responded to the pandemic and how they came out of it. It is possible to see the falls as the lockdowns hit and the sharp recoveries thereafter. It has been a good forward glance of what we will see from the CSO in a few months when it does its own numbers and looks at retail sales, surveys and things like that.

Chairman

Obviously, many transactions are now carried out on cards which might not have been previously. While I cannot speak for anybody else, many people do not carry cash in the way that they did previously. Many people in my community live a mostly cash-based lives because they are in receipt of small sums of money. Is there a problem with the data from that aspect? Will they truly reflect what is happening in lower-income households? They tend to take their money out at the beginning of the week and parcel it out very carefully.

Mr. Eddie Casey

That is an interesting point. There is a gap in that when it is taken out as cash, we do not know where it goes afterwards. We have very good insights into where the card spending goes. We know it is on groceries, fuel, restaurants, retail or whatever because this is where the point of sale was. However, if it is an ATM withdrawal, it is anyone's guess where it ends up. We then need to rely on the survey data afterwards to try to fill in those gaps. As the Chairman said, there has been a long-term trend towards more card-based transactions which was accelerated during the Covid pandemic because people were less inclined to use cash. That might not reverse as quickly and it might be here to stay.

Chairman

That is interesting as a change and it is also interesting in terms of the data.

Mr. Sebastian Barnes

These data give rise to other possibilities. Some studies in the US looked at different communities just to see in real time how inequality is responding in things like that. There is a significant widening of the possibilities with these kinds of data. We may not be quite there yet. A good characteristic about the Irish data is that we have the ATM data. Some countries do not have that and so it is hard to know - they do not know whether people are spending more with cards because they are doing less spending with cash or because they are actually spending more.

Chairman

As we all know, these are disaggregated data. The Central Bank makes the data available to IFAC. It is not under the purview of any particular company to make those data available.

Mr. Eddie Casey

No, they are provided by the Central Bank. They are made publicly available every week.

Deputy Richard Boyd Barrett

I wish to pick Mr. Barnes up on the point about the large corporate tax revenues that are coming in and whether the best place to put them is in the rainy day fund or to pay down debt. I question that. I would have thought the lesson in the current situation is we need to invest rapidly in areas which are making us more vulnerable to this inflationary crisis - to insulate ourselves against it rather than thinking about saving up money against the rainy day further down the road. We should throw enormous amounts of money at education, training and apprenticeships. We should remove every barrier to educating and training, given that the greatest resource we have is the human beings who live here but who are wasted in their ability and talent to a very large degree because it is made so difficult for them. Large numbers of people could be contributing but it is made difficult for them to realise their potential and make a contribution.

We are seeing it now with all these bottlenecks - I love these economic euphemisms - but we have a lack of apprentices, tradespeople and people trained in areas such as construction, health and education. It would be far better to take these windfall revenues or what might turn out to be temporary revenues from a relatively small number of multinational companies and really funnel them into an area like that, because that would actually protect us. Obviously, we need to invest in sustainable energy production in order that we become less vulnerable to international price shocks in that area.

We also need a focus on the diversification of Irish agriculture when we consider that food security is becoming an issue again. We need to rapidly diversify Irish agriculture which would have a very positive environmental spin-off by reducing imports and therefore carbon footprint further down the road. It would also insulate us to some degree against inflation that is dictated by international market pressures. These are choices. There will be a debate potentially about this rainy day fund. I would be interested to hear Mr. Barnes's response.

Regarding the wage thing, the RTÉ website has a headline to the effect that the Minister, Deputy McGrath, says there will be tough negotiations ahead over the public sector pay agreement. The debate has already started with the suggestion that we cannot give these workers too much to compensate for inflation. I ask Mr. Barnes to reiterate the figure that he gave, which might be helpful in our debate in the next while. He mentioned €2 billion for pensions wages and social welfare to keep pace with inflation. I ask him to tell us what that is based on, because it is an interesting figure.

Is there not a danger that if we do not give workers, pensioners and social welfare recipients increases at least in line with inflation, we start to create the conditions for a possible recession as consumer demand begins to fall off? We know a significant driver of Irish economic growth has been consumer demand. If ordinary working people just cannot afford to spend and therefore fewer goods and services are purchased, is that not as big a danger? I take Mr. Barnes's point about not giving money to people who really do not need it or who have benefited and deciding where those thresholds would be is a matter for a serious debate. However, is there not a big danger that if we start imagining that there could be something really wrong with giving workers pay increases or giving people pension increases to deal with inflation, it could have an equally bad effect in terms of consumer demand?

Mr. Sebastian Barnes

The Deputy made two very important points. Obviously, investments in areas such as education, training and agriculture would be very good for the country but they could also be good for the public finances in some sense if they have high returns, that is, by training people so they have higher incomes, which feed back into the tax system, and are less reliant on the welfare system. Depending on how they are done, all these can, in principle, be helpful to the public finances. They are also relevant to the public finances for other reasons. The Government should naturally be thinking about that and the democratic process needs to take a view on it.

There may be a case that under certain conditions, some of this could be financed from some of these excess receipts. However, there are a number of caveats to that. The case would need to be made very carefully if the Government were planning to do that. One of those caveats is that many of these things actually involve recurrent spending. In education spending, for example, there is a new generation every time.

One is locking in recurrent spending and there may also be current expenditure that is related to the capital part. Funding recurrent spending from a volatile source of revenue that we might lose is risky. That risk must be carefully considered.

Another point is the overall amount of money put into the economy. One of the reasons for not putting so much of the corporation tax money into the economy is that it is essentially coming from the outside and is being pumped into the economy. In an environment where there are risks of inflation and overheating, that is a constraint on how much you can put in. If it is funded through taxation there is an offset somewhere, in that someone has less money to spend. If, however, you are just funnelling in external money, that is a recipe for overheating, which may not be sustainable if the tax revenues are not sustainable. In short, definitely the investment is a source of future prosperity or at least it should be if it is done properly. How that interacts with the rainy day fund must be very carefully considered with these kinds of receipts because there are risks involved.

On the second part, in terms of wage inflation I wish be clear about the figure that I gave. It was a figure of approximately €2 billion for operating for the unexpected inflation. It is the difference between what was projected in the budget and in the stability programme update, SPU. Inflation has actually been a bit stronger than that so the actual number would be a bit higher. The number actually includes the State pension, public sector pay, welfare rates and payments on goods and services. About half of that would be public sector pay. Of the remaining, one quarter of the title would be pensions. The welfare and the other parts are actually relatively small compared to that. This is one of the cases for targeting the number of welfare recipients relative to the size of the economy. Relative to the population, it is a relatively well-defined group. That is purely the figures part.

On the economics, the Deputy is right. This is one of the reasons why we say that when the Government strikes the balance, the reasons for the extra cost of living supports are partly for very vulnerable people or people on low income in general, but it is also to support the economy. Most people's wages have not gone up in response to the inflation we have seen. Mostly this is because we do not have a lot of choice as to whether we purchase fuel or food. When people are having to make choices between that and other things, the other things are the ones that are domestically produced. For example, people might go out less and they would spend less on all sorts of other domestic activities. This is why it will slow consumption in the domestic economy. There is some case to have some increase in wages because of that reason. Increasing in line with the full value of those pressures for everyone is not a desirable policy because one would be helping everyone, and yet the economy as a whole is being negatively impacted by these higher import prices. Not everyone can be fully compensated. That is obviously a very extreme case. The question is: within that, who is the Government going to compensate and by how much? There is no simple answer to that. This judgment must be reached by the political process and by society more widely.

Deputy Richard Boyd Barrett

I thank Mr. Barnes.

Chairman

Is everyone happy? I do not see further hands up online. Everyone is quiet. That leaves me to thank our members today. I apologise for the interruption of the vote but these things happen sometimes. It has been an incredibly useful session for us. We got a huge amount of information, which I am sure we will be drawing on in the next few months as we lead up to the budget. It has been an incredibly useful overview. I thank the witnesses for coming.

Deputy Bernard J. Durkan

Before the Chairman concludes, I wish to bring to her attention the quality of the electronic system. It was appalling this evening. It continuously cut in and cut out. We could not hear each other or at least I could not hear from where I was. Could anything be done with it to make it more efficient?

Deputy Richard Boyd Barrett

You will have to come down to join the party Bernard.

Chairman

Can we all stop referring to my committee meeting as a party? I do not hear that of any other committee.

Deputy Mairéad Farrell

It is so much fun.

Chairman

I will bring up Deputy Durkan's point with the Houses of the Oireachtas Commission. It is a good point. I too have noticed that throughout the session it has been a problem, with people cutting out and speeding up. I take that point. I will refer it back to the Houses of the Oireachtas Commission.

The next public committee meeting is scheduled for Wednesday, 15 June at 5.30 p.m.

The select committee adjourned at 7.45 p.m. until 5.30 p.m. on Wednesday, 15 June 2022.