Vol. 852 No. 3
1. Deputy Michael McGrath asked the Minister for Finance his projection for the deficit for 2014; the adjustment needed to bring the deficit below 3% and 2%, respectively; if a neutral budget will exclude the impact of already announced measures such as water charges; and if he will make a statement on the matter. [37399/14]
The purpose of this question is to establish some baseline data for budget 2015. I should not really have to use a priority question to obtain this information, but, unfortunately, I do because we in opposition are still working from a document that dates from last April. We are relying on the odd scrap of information thrown into the public domain by Ministers who are talking in broad terms about a "neutral budget". Therefore, I tabled this question to try to establish the baseline position against the backdrop of the improving Exchequer figures and economic data to determine what it actually meant in budgetary terms.
The stability programme update, SPU, published in April forecast a deficit of 4.8% of GDP for this year. However, the Deputy should be aware that there have been a number of important changes since April, most notably the performance of taxes and the impact of the European system of national and regional accounts, ESA 2010 statistical reclassification. Cumulative tax revenue was up some €971 million or 4.1% on profile by the end of August. This, coupled with continued expenditure restraint, means that we will over-perform on the 4.8% of GDP forecast by a comfortable margin. The next official forecast of the 2014 deficit will be contained in the White Paper on Receipts and Expenditure which will be published at midnight on Friday, 10 October.
Changes in European statistical standards have led to the upward revision of the level of GDP in Ireland going back a number of years. These were first presented by the CSO in July 2014 and budget 2015 will be the first publication based on the new standard. Overall, GDP in 2013 was revised up by the CSO by €10.7 billion or 6.5%, from €164.1 billion to €174.8 billion. The bulk of the upward revision, some €7 billion, relates to the inclusion of research and development as capital formation. However, other revisions mainly relating to revised estimates for exports and the inclusion of illicit activity have added about €3.7 billion. These revisions have had a small positive impact on growth rates in previous years.
Turning to budget 2015, the Government's overarching fiscal policy continues to be the delivery of a deficit below 3% of GDP.
While there are still moving parts, it is expected that this target will be achieved with a broadly neutral budget.
Additional information not given on the floor of the House
The budgetary arithmetic will include the impact of measures already introduced, although it is estimated that there will be a very limited revenue carryover into 2015 as a result of budget 2014 measures. However, it should be noted that the pension levy of 0.6 percentage points is not included in the budgetary arithmetic for 2015. I also make the point that the moneys raised from water charges will be received by Irish Water which, as a commercial semi-State company, will not be a part of general government. As such, these receipts do not count as general Government revenue and, accordingly, will not impact on the deficit.
With regard to achieving a deficit of 2% of GDP, I would normally be able to advise the Deputy that an improvement in the deficit of 1% of GDP equates to a specific nominal change. However, owing to timing factors relating to the submission of macroeconomic forecasts to the IFAC for endorsement and the significant impact of the ESA 2010 GDP uplift, I am not able to provide a definitive figure at this time. At SPU time, an improvement in the deficit of 1% of GDP equated to an improvement in the nominal deficit of €1.75 billion. The quantum of consolidation necessary to deliver this improvement would be dependent on the composition of consolidation measures and their impact on economic growth.
I thank the Minister and call Deputy Michael McGrath.
I would like the Minister to continue with his answer.
I am sorry, but the rules of the House state the Deputy has one minute in which to respond.
The Minister was just about to get to the important part. He has restated what was said publicly, that is, a broadly neutral budget will be sufficient to bring the deficit below 3% of GDP in 2015, which is to be welcomed. As he indicated, statistical reclassification has had an important impact on the opening position, but I can only speak for Fianna Fáil when I say that, as we try to finalise proposals, it is unfortunate that reform of the budgetary process has not happened and that the White Paper on Receipts and Expenditure, setting out the opening position for budget 2015, is to be published only at midnight on the Friday before the budget. Will the Minister elaborate on what he means when he refers to "a broadly neutral budget"? Does it take account of anticipated savings from the early repayment of International Monetary fund loans? Does it take account of the expected €300 million to be raised from domestic water charges? Will the Minister give the House information beyond what is already in the public domain? What is meant by "a broadly neutral budget" and will it lower the deficit to a little under or well under 3% of GDP?
I cannot announce the budget today or give the base figures the Deputy has requested, but I will give as much information as possible. As Irish Water has been set up as a commercial semi-State company, it will not be part of the general government position; anything paid will go to it - it will not be received by the Exchequer. As the pension levy of 0.6% is not included in the budget arithmetic for 2015, if it is to continue, further provision will have to be made for it.
It is included in the figure of 0.15% for next year.
We would have to add on as much again.
That would be a policy change.
As it was introduced on a four year basis, if it was to continue, further provision would have to be made for it. I think the Deputy suggested a figure of 2%, but the latest figures I have suggest a further reduction of 1% of GDP would be the equivalent of €1.75 billion. If we went from below 3% of GDP to below 2%, a further reduction of €1.75 billion would have to be made. It is a big chunk of money.
The Deputy asked what was meant by a "neutral budget". It means an opening position where receipts match expenditure on the basis of there being no policy change.
I understand that, as announced last year and enacted, the pension levy will remain in place at 0.15% for 2015. That has been pencilled into the figures.
I was referring to the 0.6% figure - the major levy introduced on the basis of there being a four year cycle. There is no provision for it as a receipt in the figures.
The Minister informed the House that a further 1% reduction in the deficit would mean a fiscal adjustment of an additional €1.75 billion. He has stated publicly today and previously that a neutral budget would bring us below 3% of GDP - the Minister for Public Expenditure and Reform, Deputy Brendan Howlin, has done likewise. However, some estimates indicate a broadly neutral budget woud bring us closer to a figure of 2% and these differences are important. Nobody expects the Minister to announce budgetary measures yet, but we expect information on how things stand today as the deficit impacts on all of us in our approach to the budget for 2015.
I am giving the Deputy all the information I can. He will receive the White Paper in the normal way on the Friday before the budget and it will give more precise data for the opening position. It will vary with budgetary changes that will be announced on budget day.
Is there any way I can come in on this question?
Not until the other questions have been asked.
2. Deputy Pearse Doherty asked the Minister for Finance the scope for tax cuts in budget 2015 and the steps he will take to make sure budget 2015 is a progressive budget. [37263/14]
My question is broadly similar to the last one as it refers to a progressive budget for 2015 and relates to the definition of a "neutral budget". There has been much talk of political reform and stroke politics in recent weeks, but the manner in which the budget is being prepared is not good enough. Arming the Opposition with information in order that alternatives can be provided is simply not good enough. Deputy Michael McGrath and I have had to use Priority Questions to elicit information, but we have not received further clarity. The Minister has said a neutral budget means no change in policy, but policy announcements have been made. For example, the student contribution has been raised by €250 to €3,000 this year. Is this included in the arithmetic for a neutral budget as it is now policy? Can it be pulled back? Other measures such those involving capitation cuts and lone parents have already been announced. Are these measures needed to allow for a neutral budget?
The Government's overarching fiscal policy for 2015 continues to be delivering a budget deficit below 3% of GDP. Delivering this target will take account of the improved performance of the economy and tax revenue. A further factor is the impact of the European system of accounts, ESA, 2010 statistical changes introduced by the European Union.
Regarding taxes, cumulative tax revenue was up some €971 million, or 4.1%, on profile by the end of August. A considerable part of this over-performance against profile will have a positive base effect on forecast 2015 tax revenues. The introduction of the ESA 2010 European statistical standard has led to the upward revision of the level of GDP in Ireland over a number of years. These impacts were first presented by the Central Statistics Office, CSO, in July 2014 and budget 2015 will be the first publication based on the new standard.
Overall, GDP in 2013 was revised upwards by €10.7 billion, or 6.5%, by the CSO, from €164.1 billion to €174.8 billion. The bulk of the upward revisions, €7 billion, relates to the inclusion of research and development as capital formation. However, other revisions, mainly relating to revised estimates for exports and the inclusion of illicit activity, have added about €3.7 billion. These revisions have had a small positive impact on growth rates in previous years. It is expected that the budgetary objective of a deficit of less than 3% of GDP can be achieved with a broadly neutral budget.
The Deputy will be aware that I have stated numerous times that I believe the income tax burden is currently too high in Ireland and that it needs to be reduced. I have also stated that, although it is my intention to alleviate the burden, I can only do so when the public finances allow it. With budget 2015 only two weeks away, I am not prepared to be drawn into speculation on specific budgetary measures at this time. However, I will say that, as part of the normal budgetary preparations, I am examining potential options for changes to the tax system as part of the overall budget package to be agreed by the Government.
Regarding progressivity, Ireland already has a very progressive income tax system in that those on higher incomes pay proportionately higher rates of tax on their incomes than those on lower incomes. It is an important feature of the tax system and one of the factors taken into account in the formulation of tax policy proposals.
The Deputies did not have to table Priority Questions as they could have received this information through written questions on the first day of this term.
That is not the truth. These questions are not being answered.
I submitted a written question and the Minister answered, but I want to tease it out. He says a neutral budget for 2015 is possible outside outstanding policy commitments. The Tánaiste and Minister for Social Protection, Deputy Joan Burton, yesterday said €750 million of cuts need not proceed, but the Government has already announced some cuts in 2015. We legislated for such cuts in the Finance Bill. I am not asking the Minister for specific details on the budget, but I raise the example of the student contribution which is set to rise by a further €250 to the maximum figure of €3,000 in 2015.
Are the other measures that have been legislated for in education and other areas, including social welfare for lone parents, necessary to achieve the neutral budget? Will the savings that accrue from that suite of measures, already announced as Government policy, be necessary for the neutral budget, or are we starting from a point at which the neutral budget is possible without anything that has not taken effect to date taking effect? If we are to have real parliamentary debate and if real alternatives are to be provided, it is important that the Department, through the Minister, give the Opposition information so that we can produce as good an alternative budget as possible.
The answer to the Deputy’s question depends on the effective date of the policy change. If the effective date was 2014, the Minister responsible would have to provide for it within the 2014 Estimates by way of savings from elsewhere in the Votes or by way of Supplementary Estimate. If, on the other hand, the changes are with effect from some date after 1 January 2015, it is not in the base and must be provided for in the Book of Estimates and the budget.
That is welcome. Any measure that has been announced, such as the student contribution fee, would have an effective implementation date after 1 January 2015. Therefore, the savings that would accrue from that are not included in the budget arithmetic to make up a neutral budget.
That is next year’s base.
If it is next year’s base, we are starting from a point at which that does not have to be provided for to achieve a neutral budget.
With regard to what the Minister terms a broadly neutral budget, providing the receipts and expenditure at midnight on Friday, three days before the budget is announced, is not sufficient. We need to change that system. Can the Minister give us his analysis, based on his best judgment, of what effect a no-change policy today will have on the 3% level? We will not hold him to this, because he has used rule-of-thumb analyses and has been forthright with information in the past. Will we come in at €200 million or €300 million below that figure, or will we be just close enough to it? Can he give us some indication that will help us prepare? We in the Opposition do not have the luxury of waiting till midnight on Friday to come up with an alternative budget within a few hours.
For the purpose of illustration I will talk through this, but the Deputy is not to tie me to the precise figures. The opening position last April was that we needed an adjustment of €2 billion to get the deficit down below 3%. That was to be divided in a proportion of 2:1, with roughly €1.3 billion from expenditure cuts and €700 million from tax increases. As the budgetary position improved over the year, the level of adjustment estimated by officials in the Department began to narrow. It is at such a point now that, if I did nothing in a fortnight’s time - if we brought no budget in - there would be roughly enough money in the Exchequer to run the country on the basis of no policy change in 2015 while bringing the deficit down to €2.9 billion, or around there.
Is that based on the growth estimate?
It is not so much based on the growth estimate as on the flow of taxes. Growth is tenuous because it is a projection. The bulk of what we are talking about is money already collected. It is the €970 billion in advance of budget at the end of August. That is not put in a safe. As it comes in, because it is not spent, it begins to reduce the deficit. If the Deputy looks at the statement on the August Exchequer returns he will see that the deficit was €1.3 billion below budget forecast at the end of August this year. It is progressive. As the taxes come in the deficit goes down. The deficit is probably somewhere below €4 billion at this point in the year, and we can project where it will land at the end of the year. I use the word “broadly” to cover the fact that it might be €50 million or €100 million above or below the line, but in general terms approximately €2 million has come in that was not estimated. That means far fewer cuts.
3. Deputy Stephen S. Donnelly asked the Minister for Finance the recommendations from the July report of the Oireachtas Joint Committee on Finance, Public Expenditure and Reform on the mortgage crisis that he intends to enact; and when he will enact same. [37397/14]
The Oireachtas Joint Committee on Finance, Public Expenditure and Reform held a long session earlier this year on the mortgage crisis. We met the chief executives of the banks, the Insolvency Service of Ireland, the official assignee, the Governor of the Central Bank and various organisations working with people in mortgage distress. The committee produced an all-party report in July of this year. The committee has 28 members and the report received unanimous support. One member declined to vote, not because he objected to the recommendations but on other ideological grounds. It is a strong all-party report. There are 47 recommendations in the report, which deal with sustainability, consistency, administrative and legal issues, communication and transparency issues, specific types of restructure, some that are not working, changes that should be made to some, new ones that should be brought in, the mortgage-to-rent scheme, the appeals process, the insolvency service and so forth. It made some serious recommendations about things that needed to change. Has the Minister read the report? I would very much like to engage with him at length in committee about this. Is he considering the recommendations with a view to implementing them and, if so, could he give us an idea of when we might start to see the changes take place?
I note the recommendations contained in the report of the Oireachtas Joint Committee on Finance, Public Expenditure and Reform on mortgage arrears. I understand that the Governor of the Central Bank will write to the committee shortly regarding the recommendations contained in the report.
I have informed this House previously that the Government has developed a comprehensive cross-departmental strategy in this area in line with the main recommendations of the 2011 Keane report. The implementation of this strategy is overseen at Government level by a special sub-committee which is chaired by the Taoiseach and at official level by a mortgage arrears steering group which is chaired by the Department of Finance. A number of key measures have been advanced in this regard. The first is an intensification by the Central Bank of its engagement with mortgage lenders to require them, under the mortgage arrears resolution targets, MART, process, to propose and conclude sustainable and durable alternative arrangements with their customers in mortgage arrears. Targets have been set to the end of 2014 and by this date the relevant banks covered by the MART process will be required to have proposed sustainable solutions for 85% of mortgages which are more than 90 days in arrears and to have concluded solutions with 45% of such mortgages. Other measures include: significant reforms to personal insolvency and the establishment of the Insolvency Service of Ireland to provide more accessible and flexible statutory frameworks for people with unsustainable personal and mortgage debt; updating the code of conduct on mortgage arrears to provide additional safeguards for co-operating borrowers while also promoting and encouraging efforts by both lenders and borrowers to meaningfully address mortgage arrears or pre-arrears; the application of mortgage-to-rent schemes, which are now available as a social housing response to allow people to remain in their houses where possible; and the provision of an independent mortgage information and advice service.
The Central Bank's latest publication in this regard, Residential Mortgage Arrears and Repossessions Statistics, for the end of quarter 2, 2014, shows that the number of mortgage accounts for principal dwelling houses, PDHs, in arrears fell for the fourth consecutive quarter. At the end of June 2014, a total of 90,343 PDH mortgage accounts, or 11.8% in total, were more than 90 days in arrears. This represented a decline of 3% over the quarter. The data also shows that almost 102,000 PDH mortgage accounts were classified as restructured and, of these, 81.2 % were deemed to be meeting the terms of their current restructuring arrangement.
Additional information not given on the floor of the House
Separately from Central Bank quarterly reports, a monthly reporting regime on mortgage restructures and arrears for the six main banks covered by the Central Bank's MART process has been put in place by my Department. The latest publication, with data for the end of July 2014, shows that the number of PDH mortgage accounts in arrears of greater than 90 days has fallen by over 7,100 when compared to the end of the first quarter, while the total number of PDH accounts in mortgage arrears has fallen by 8,845 in the same period.
Taken together, the overall strategy and framework is in place to enable banks to work with distressed homeowners to reach sustainable solutions for dealing with their personal indebtedness situations. Nevertheless, relevant Departments and agencies will continue to keep the position under review and can make any further adaptions to the overall framework as considered appropriate. However, early and effective engagement between borrowers and lenders remains key to resolving most cases of mortgage difficulty. Where there is effective and meaningful engagement by all parties regarding a mortgage in difficulty, the data shows that an increasing number of durable, long-term mortgage restructures can be and are being put in place.
I do not think I heard a single word in that reply that answered the question I asked. I asked what measures from the report of the Oireachtas Joint Committee on Finance, Public Expenditure and Reform the Minister intends to enact.
In response, the Minister said the Governor of the Central Bank will write to the finance committee and then he spoke about the Keane report and mortgage arrears data. The committee report was written in light of the Keane report and it concludes that the current process, including the points listed by the Minister arising from the Keane report, is not working. A total of 47 separate recommendations are made for what needs to happen above and beyond the Keane report. Specific to the question I asked on the 47 recommendations from the cross-party finance committee report from July, which of the recommendations does the Minister intend to enact and when will that happen?
Some of the recommendations are applicable to the Department of Finance and others are applicable to the Central Bank and the banks themselves. Of those that are applicable to the Department of Finance, recommendation 2, for example, states that the committee rejects the Central Bank’s general acceptance of legal solutions as “sustainable” and requests the Minister for Finance to intervene. The strong view of the Government is that in respect of co-operating borrowers under the mortgage arrears resolution process, repossession of a person’s primary home should only be considered as a last resort. Every effort should be made to agree an acceptable arrangement as an alternative to repossession. I assure the Deputy that both my Department and I have expressed that view to lenders and keep in regular contact with them on this important issue.
Recommendation 20 is another one that applies to the Department of Finance. It calls for promised legislation on the code of conduct on mortgage arrears to be progressed with the utmost urgency. I am committed to bringing forward legislation that protects consumers where mortgages are sold to unregulated entities. The Government has reiterated the commitment on several occasions. In July and August of this year my Department ran a public consultation seeking views on its proposed legislation to protect consumers whose loans are sold to unregulated entities. We got 18 submissions from a range of respondents across the interest groups. Officials in my Department are carefully considering the submissions. It is anticipated that the legislation will be published before the end of the year.
Recommendation 35 also applies to the Department of Finance. The committee notes the success of the pilot initiatives financed by AIB whereby independent advisers to customers in arrears facilitate re-engagement into the resolution process. There was a recommendation from the committee to expand on the process. The Government has provided an enhanced range of information and guidance services for mortgage holders, including a dedicated information website, a mortgage arrears information and advice helpline and the provision of independent financial advice for mortgage holders who are presented with long-term mortgage resolution proposals by lenders. The advice is provided by a panel of accountants drawn from members of the main accountancy institutions in Ireland who have agreed to participate and support their independent service.
Recommendation 37 is another one that is applicable to the Department of Finance. The committee welcomed the publication, monthly by the Department of Finance, and quarterly by the Central Bank, of mortgage arrears figures but noted the differences between the figures and recommended that both parties would liaise to produce an agreed uniform set of data.
The Department has requested the six main lenders operating in Ireland that fall within the Central Bank mortgage arrears resolution target process to provide data on the restructuring situation. The process is separate from the Central Bank and the two sets of figures will not always match. A number of recommendations are applicable to intervention by the Central Bank and the Governor has committed to writing to the committee, which can discuss the range of recommendations with him.
If the implication of the question is that we did not take the report seriously, that is not the case, as we did. I did read the report and thought it was very good. There is much material in it that will assist the situation.
There was no implication that the report was not being taken seriously. The question that was asked in good faith was about the provision of an update.
I accept the Insolvency Service of Ireland, ISI, comes under the remit of the Department of Justice and Equality but is a key component of what is happening under the remit of finance, namely, the mortgage crisis. Four of the recommendations in the report relate to the Insolvency Service. We have compelling data, and we saw during the investigation, that the Insolvency Service is not working. It has processed approximately 27 or 47 personal insolvency arrangements, PIAs, but relative to the scale of the problem it is as good as zero. I appreciate that the review of the service will be conducted by the Minister for Justice and Equality, Deputy Fitzgerald, but would the Minister be happy for a review to take place? The previous Minister for Justice and Equality, Deputy Shatter, said that if the system did not work then it would be reviewed straight away. In his remit as Minister for Finance looking at the impact the service is having or not on the mortgage crisis, would he like to see a review of the insolvency legislation to get the ISI and the insolvency process working better?
It is not working as well as we had hoped but it is working. The number of cases being processed is accelerating. There are blockages within the system. A review is incorporated in the insolvency legislation but that is about two years’ down the line. Provision has been made for it in the Act but we need a more immediate review to see whether we can remove blockages. That work is proceeding, and I have come across recommendations from the director of the Insolvency Service of Ireland. There will be changes in processes, protocol and regulation but they will not require legislation. That should remove some of the perceived blockages from the system. If legislation is necessary it would come about as a result of the later review which is provided for under statute.
4. Deputy Michael McGrath asked the Minister for Finance his plans for the future of Allied Irish Banks; and if he will make a statement on the matter. [37400/14]
The question relates to the future of AIB. I am aware the Department is appointing a panel of financial advisers to advise on the possible disposal of the State’s interests in the banking sector. The purpose of the question is to establish the Minister’s intentions in respect of AIB. I have some views on the matter which I will outline.
As the Deputy will be aware, the taxpayer has made a very substantial investment in AIB and it is critical that we carefully examine all possibilities open to us to ensure this investment is protected and enhanced with a view to ultimately generating a return for the State.
The return to profitability by AIB in the first half of 2014 is good news from the perspective of the Irish taxpayer as it enhances the value of the bank for the taxpayer, which will over time allow the State to maximise the return on its investment. The latest valuation of the AIB shares was carried out by the National Pensions Reserve Fund Commission, NPRFC, at the end of 2013, and this valued the State's ordinary and preference shareholding at €10 billion. Including the contingent capital, CoCo, this brings the value of the State's shareholding to €11.6 billion. Since the previous valuation of the State's holding, bank stocks in many eurozone countries have performed well. AIB has posted a profit in mid-2014 and I would therefore be confident that the value of AIB has also increased.
With respect to the State's holdings in the banks, Government policy remains unchanged and we do not wish to hold these investments in the banks over the long term. Subject to market conditions, therefore, we are willing to exit in a manner that maximises value for the taxpayer.
In the past 18 months the State has exited successfully from some debt investments with the sale of the BOI CoCo and preference shares in addition to the sale of Irish Life. Holding our equity investments longer enables the State to benefit from the economic recovery and fortunately given the significant cash resources we hold, we are not under pressure to exit these remaining investments.
The bank engages regularly on a range of issues including the financial performance of the bank, strategic objectives and its capital structure with officials from the shareholding management unit in my Department who are charged with this responsibility.
In recent months, the Department of Finance has been engaged in a process to appoint panels of financial advisers to assist in the receipt of timely advice relating to the future disposal of the State's banking sector investments, and other ad hoc assignments that may arise from time to time.
Additional information not given on the floor of the House
The Department has had the need for advice in the past and will continue to have a requirement in the future and the appointment of these panels is prudent planning to ensure the State is in a position to receive necessary advice in a timely and cost efficient manner. While I have said previously in respect of AIB that we may wish to test the market next year, the creation of these panels should not be seen as a signal that a transaction is imminent or indeed will happen at all.
There are three panels for the provision of the following services: panel 1 - capital markets, strategic, M&A and restructuring advice; panel 2 - general financial advice; and panel 3 - capital markets distribution services. The process, which is in line with the open procedure of EU procurement legislation, is well advanced and the Department expects to be in a position to publish the list of successful tenderers to each panel shortly.
I am not averse to the State divesting itself of at least some of its shareholding in AIB at the appropriate time, but there should be no question of selling any of our shareholding in AIB, pending the outcome of the negotiation of a bank debt deal. Selling equity share capital in AIB now would be a complicating factor in that arrangement and we are supposed to be preparing an application for a deal on retroactive bank recapitalisation as soon as next month. It is, therefore, absolutely premature to speak about selling part of our shareholding in AIB until there is full clarity on the outcome of the bank debt deal negotiations. AIB is in recovery, but it still has a distance to travel. I am, therefore, concerned about divesting our interest in AIB at a time when competition in the banking sector is in such short supply. I called on the Minister before to bring forward a White Paper on the banking sector and the fundamental point is that any decision to sell part of our shareholding in AIB cannot be made in isolation from the overall strategy in the banking sector. That sector has not recovered fully by any means and it is premature for the State to divest some of its shareholding in AIB at this time.
I have no plans to divest any portion of AIB in 2014 and no decisions have been made on divesting subsequent to that year. The major events that will occur in banking in Ireland will take place at the end of October, when the result of the stress test emerges. We will want a full account of the stress test before we begin to form policy on the future of AIB and our residual shares in Bank of Ireland and PTSB.
I accept that the Minister must, of course, accept the outcome of the stress tests before making any decision. Does he, equally, accept that we need to know where we stand on a bank debt deal before making any decision on the future of AIB. Selling a stake in AIB now to private investors would be, at a minimum, a complicating factor in any negotiation on a deal on bank debt. We are supposed to prepare an application for a retroactive deal to be submitted as early as next month. The issue must be dealt with and concluded one way or the other before any decision is made on AIB. There is a distinct lack of competition in the banking sector. Any decision to sell part of the ownership of AIB must be made in the context of the banking sector's current state. We need more competition and I would like the Minister, his officials and agencies on behalf of the State to actively seek to attracvt more competition to the banking sector which is badly needed. We need direction and a strategy for the future. The banking sector is coming off its knees and beginning to recover, but customers, including personal borrowers and those from small and medium enterprises, are still being gouged and paying significantly higher interest rates than in other eurozone countries. This is simply not acceptable. The banking sector has not been repaired and it is premature in 2014 or 2015 to sell a share in AIB. Does the Minister accept that we need finality on the question of a bank debt deal before making any decision on divesting some of the shares in AIB?
Things are evolving pretty quickly. With regard to the business plan for recovery in AIB, it is well ahead of the targets set, as it did not expect to be in profit in 2014. It is significantly in profit, with the figure in excess of €400 million. The two banks are strengthening well. The economy is growing at pace and there are effectively only two significant banks in business; therefore, there is a major business opportunity and they will move very rapidly to strengthen. I do not disagree with a number of the points made by the Deputy and all of these considerations will be taken into account before we make any policy decision on the disposal of AIB.
5. Deputy Pearse Doherty asked the Minister for Finance his plans for the State's stake in Allied Irish Banks; the discussions that have taken place on the issue; and the persons, companies or institutions involved in these discussions. [37264/14]
This is essentially the same question that was answered earlier. I have my own views and understand things can evolve. A script has been followed by the Minister and the Department in order to return AIB to profitability and everybody agrees that it was the intention of the bank to enter profitability at the end of the year. It is welcome that this aim has been achieved. The idea was to fatten the bank and sell it. When he appeared before the finance committee last year, Mr. David Duffy spoke about meeting people in America and so on and being ready if the Government decided to sell shares. That has always been on the cards. I agree that we should not examine this matter before the retroactive recapitalisation issue is dealt with. We have not even passed the legislation to deal with it. The Minister committed at the finance committee to make an application and the signals being sent to the Minister's colleagues on the board of governors of the European Stability Mechanism are that there is a greater option being pursued outside retroactive recapitalisation. It weakens the argument. As the Minister did not indicate it yesterday, will he say in Parliament today that he will make an application for retroactive recapitalisation of AIB and the other banks in which we hold shares?
The taxpayer has made a very substantial investment in AIB and it is critical that we carefully examine all possibilities to ensure this investment is protected and enhanced, with a view to ultimately generating a return for the State. Officials from the shareholding management unit in my Department are charged with this responsibility and continue to engage with the bank on a regular basis on a range of issues, including the financial performance of the bank, strategic objectives and its capital structure.
In recent months the Department of Finance has been engaged in a process to appoint panels of financial advisers to assist in the receipt of timely advice relating to the future disposal of the State's banking sector investments and other ad hoc assignments that may arise from time to time. The Department has had the need for advice in the past and will continue to have a requirement in the future and the appointment of these panels is prudent planning to ensure the State is in a position to receive necessary advice in a timely and cost-efficient manner. I have said previously in respect of AIB that we may wish to "test the market" next year, but the creation of these panels should not be seen as a signal that a transaction is imminent or will happen at all. There are three panels for the provision of the following services. Panel No. 1 deals with capital markets, strategic, mergers and acquisitions and restructuring advice; panel No. 2 deals with general financial advice; and panel No. 3 deals with capital markets distribution services. The process which is in line with the open procedure of EU procurement legislation is well advanced and the Department expects to be in a position to publish the list of successful tenderers to each panel shortly.
With respect to the State's holdings in the banks, Government policy remains unchanged in that we do not wish to hold these investments in the banks in the long term and, subject to market conditions, are willing to exit in a manner that maximises value for the taxpayer.
Additional information not given on the floor of the House
We have already exited some of our debt investments with the sale of the Bank of Ireland contingent convertible notes and preference shares, in addition to the sale of Irish Life. Holding our equity investments longer enables the State to benefit from the economic recovery and, fortunately, given the significant cash resources we hold, we are not under pressure to exit the remaining investments.
With regard to AIB, the return to profitability is very good news from the perspective of the taxpayer, as a profitable bank is a more valuable bank, which will over time allow the State to maximise the return on its investment. The latest valuation of the AIB shares was carried out by the National Pensions Reserve Fund Commission at the end of 2013 and it valued the State's ordinary and preference shareholding at €10 billion. Including the contingent capital, this brings the value of the State's shareholding to €11.6 billion. Since the last valuation of the State's holding, bank stocks in many eurozone countries have performed well. AIB posted a profit in mid-2014. I am confident, therefore, that the value of AIB has also increased.
There is a need for an open and frank discussion on the future of AIB. The best outcome would be full retroactive recapitalisation by the ESM, fulfilling the promise of the "game changer" and "seismic shift". If it was rejected, genuine questions must be asked about what to do with AIB, now that it has returned to profitability. Could we use it to bring in revenue for the State and use our shareholding to ensure we will have a banking sector that is fit for purpose?
I have a simple question which I asked earlier today and yesterday. The Minister indicates that the policy remains unchanged. I take that statement at face value. In June the Minister indicated to the finance committee that he would apply for retroactive recapitalisation of AIB. He stated:
Of course we will apply. What does the Deputy think we have been talking about for the last five minutes in reply to Deputy McGrath? Of course we will apply, but the timing is a question of the best approach.
Will the Minister confirm to Parliament that the policy has not changed and, in his own words, is, "Of course we will apply"? Is the Government still committed to applying for retroactive recapitalisation of AIB?
The policy has not changed since I spoke at the finance committee in June. I wanted to widen the debate and still want to do so. Many people think retroactive recapitalisation of the banks is simply a matter of sending a letter to the European Union and that the money will be returned.
The construct was always that there would be an exchange of shares in the Irish banks with the ESM in return for money.
It actually states that the rules will be made up by the Government at a later stage.
No. When the conversation commenced - I do not propose to go into the detail on this - in terms of the general primary colour and shape of the model, that was the idea. It was never a case of money for nothing. Obviously, there are considerations that arise from that, including whether, if one thought one could get more money on the market, one go down that road or pursue that. On the other hand, while the people running the European Stability Mechanism may be brilliant at raising money on the markets, there is nothing within their experience to suggest that they could run banks, because that is not what they do. All I am saying is that we are pursuing this along the lines outlined by me at the finance committee when we last spoke about this issue, and also that there is an alternative that might be of more benefit to the Irish taxpayer. We will pursue all options, but the bottom line must be which will achieve more money for the taxpayer.
Although the Minister has not said so, I take it, because he said there is no policy change, that the intention is still to apply and seek the maximum benefit from the ESM, which I accept will mean handing over our shares in AIB to the ESM.
The Minister said that all options were being pursued. We need a frank and honest debate on this issue. There are at least three options: the ESM option, which is the best option if we can fulfil the promise made in June 2012; the option of selling to the markets, which should be examined and considered; and the option of the State retaining its equity in AIB and ensuring the profits made by AIB as it returns to profitability - we hope its profitability will increase into the future - benefit the State and are used to ensure bank lending to particular sectors as required.
The Minister said that the policy was not to hold onto the State's equity in AIB long-term, but will he at least examine the benefits of our having a State-owned profitable bank and what that would mean for the Irish banking sector and the Exchequer?
As stated, that is not the policy. Government policy is to progressively sell the State's shares in AIB. We do not believe a State bank is the best model for the Irish economy in the medium to long term. There is a fourth alternative. We could sell part of AIB and retain a significant chunk of it in the hands of the State for a long time so that we would have an influence over banking policy through what is emerging as the primary bank. There are other alternatives. We are taking decisions as we move along, with no hard and fast position having yet been taken, other than that we do not want a nationalised banking system as a permanent feature. We regarded the intervention by the State in the banks as a rescue operation, and a very expensive rescue operation. We want a significant private holding in AIB in due course. That does not mean we would not retain a significant proportion of the bank. I am prepared to discuss all of this with the Deputy at the finance committee, because there is not as yet any firm policy position on these issues.
