Dáil Éireann díospóireacht -
Wednesday, 1 Apr 2015

Vol. 873 No. 2

Priority Questions

Mortgage Interest Rates

Michael McGrath

Ceist:

1. Deputy Michael McGrath asked the Minister for Finance his views on the standard variable mortgage interest rates banks are charging customers; the difference between rates charged to new and existing customers; the difference between the rates charged here and in other eurozone countries; if he has discussed this matter with the banks; the steps he is taking to bring more competition into the mortgage market, in an effort to bring down variable interest rates; and if he will make a statement on the matter. [13402/15]

Deputy Michael McGrath

As the Minister is aware, Fianna Fáil has tabled a Private Members' motion this week on the issue of excessive standard variable mortgage interest rates and the ability of the Government or the Central Bank to set interest rates. The motion calls on the Minister to use his influence, to express a view and to engage with the financial institutions directly and for the Central Bank to do the same. Standard variable rate mortgage customers are an exploited group of customers. They are paying way over the odds and something needs to be done about that.

Minister for Finance (Deputy Michael Noonan)

I thank the Deputy for raising this important issue. Lending institutions in Ireland, including those in which the State has a significant shareholding, are independent commercial entities. I have no statutory role in regard to regulated financial institutions passing on the European Central Bank interest rate changes or to the mortgage interest rates charged. It is a commercial matter for each institution concerned. It is not appropriate for me, as Minister for Finance, to comment on or become involved in the detailed position or manner in which individual banks choose to put forward mortgage propositions to potential customers or how that relates to existing customers.

That said, the issue of regulation of interest rates remains a policy area under active review and this has been the subject of recent correspondence between the Department of Finance and the Central Bank. The current position is that the Central Bank does not have new proposals for the additional regulation of interest rates. The Central Bank has responsibility for the regulation and supervision of financial institutions in terms of consumer protection and prudential requirements and for ensuring ongoing compliance with applicable statutory obligations. It has no statutory role in the setting of interest rates by financial institutions, apart from the interest rate cap imposed on the credit union sector in accordance with the provisions of the Credit Union Act 1997 and the requirement to be notified of penalty or surcharge interest imposed in respect of arrears.

As I stated in previous parliamentary questions, a previous Deputy Governor indicated that, within its existing powers and through the use of persuasion, the Central Bank would continue to engage with specific lenders which appear to have standard variable rates set disproportionate to their cost of funds and this is a course of action I expect the Central Bank to continually appraise.

The Deputy should be aware that the Governor of the Central Bank previously stated that it has long been understood that tight administrative control over the rates charged by banks would be counterproductive in ensuring a sufficient flow of properly priced credit on a lasting basis. Such control would strongly discourage new entrants. In this regard, ongoing competition in the banking sector will be crucial in ensuring that the economy is provided with efficient and cost effective banking services. In this regard, there has been some movement on mortgage interest rates of late by a number of institutions which suggests that the market may well be entering a new and more competitive phase.

Deputy Michael McGrath

I thank the Minister for his response, which is quite similar in nature to the response given on the Minister's behalf by the Minister of State, Deputy Harris, last night during the Private Members' debate. The problem I have with the response is that the Minister did exert pressure on the banks back in 2011, in a very public way, when there was an ECB rate reduction and the pillar banks did not initially pass that reduction on to customers. The pillar banks were called before the Economic Management Council and the Minister and the then Minister of State, former Deputy Brian Hayes, made strong comments and at least one of the banks subsequently passed on that rate reduction to customers.

The Central Bank is not just the prudential supervisor of the banks and the regulator. It is also the consumer watchdog. Take Bank of Ireland as an example. Last November, it told the Joint Committee on Finance, Public Expenditure and Reform that its cost of funds is 1.15%. Its standard variable rate for existing customers is 4.5%. That is extortion by any measure. That level of a margin being applied on a particular group of customers is unfair. There has been some downward movement on variable rates, but a number of the banks excluded their existing customers from benefiting from that reduction. This is unfair and should be addressed. They have given the reduced rate to new customers, but not to existing customers who form part of the 300,000 customers affected.

Deputy Michael Noonan

The views the Deputy is expressing are shared widely by Members on all sides. As I said in my response, a previous Deputy Governor of the Central Bank indicated that within its existing powers and through the use of persuasion, it would continue to engage with specific lenders that appear to have standard variable rates set disproportionate to their cost of funds. I will speak to the Governor of the Central Bank again and express the views expressed by Deputy McGrath and will indicate that those views are held generally in the House. I will ask him to consider what influence the Central Bank can bring to bear to bring variable mortgage rates closer to the cost of funds. However, the market movement is in that direction at present. We hope further progress can be made. New mortgages are available at much lower interest rates than the rates the Deputy has cited, but I hope existing mortgages also gain from the general downward movement in interest rates across Europe.

Deputy Michael McGrath

I welcome the fact the Minister is going to take up the issue directly with the Governor of the Central Bank. I have made it clear that I fully accept that neither the Government nor the Central Bank sets interest rates, but they have significant influence. The Minister is in an influential position, as is the Governor of the Central Bank who has a key role in terms of consumer protection. There is no doubt but that the variable rates being charged to existing customers are way out of line with the cost of funds the banks currently face. As the Minister knows well, the cost of funds is at an historic low, with the ECB base rate at 0.05%, the cost of funds on the wholesale interbank markets exceptionally low and the level of interest being paid to savers and depositors is very low. Where banks are accessing funds, they are doing it exceptionally cheaply. I welcome the fact the Minister is going to take up the issue with the Governor and hope he will bring his influence to bear on the banks and that this will result in further downward pressure, particularly for the 300,000 existing customers, many of whom have not benefited at all from the recent announcement of rate reductions.

Deputy Michael Noonan

I will do my best to do as the Deputy requests, in accordance with the legal powers I have. Obviously, however, I cannot be expected to act illegally.

Mortgage Debt

Pearse Doherty

Ceist:

2. Deputy Pearse Doherty asked the Minister for Finance the legislative steps he will take to tackle the ongoing mortgage crisis and the mounting number of repossessions; and his views on the establishment of a body, independent of banks, with power to enforce resolutions in cases of arrears on a mortgage on a family home. [13306/15]

Deputy Pearse Doherty

This question relates to the legislative or other steps the Government proposes to take in order to tackle the ongoing mortgage crisis faced by the State. We are all aware of the increasing number of families appearing before courts throughout the country in the context of repossessions. Is the Government developing a view on this matter and does it intend to put forward proposals to empower the courts to consider circumstances in which banks are vetoing solutions? Is it considering establishing an independent body? How does the Government propose to deal with this crisis, which is engulfing many families throughout the State and resulting in people losing their homes?

Deputy Michael Noonan

I thank Deputy Pearse Doherty for tabling this question. Tackling mortgage arrears is a priority for the Government. A whole-of-government approach has been adopted in addressing this issue, with a view to maximising the level of loan restructuring arrangements and minimising the number of home repossessions. Initiatives such as the reform of personal insolvency legislation, the establishment of the Insolvency Service of Ireland, the introduction of a mortgage arrears information and advice helpline and the availability of mortgage-to-rent schemes ensure that borrowers are assisted in dealing with their arrears.

In March 2013 the mortgage arrears resolution targets, MART, framework was introduced. This sets out demanding quantitative targets for mortgage arrears resolution at six Irish mortgage lenders which account for 90% of the mortgages in Ireland. The six lenders - AIB, Bank of Ireland, Permanent TSB, Ulster Bank, ACC Bank and KBC Bank - are required to meet targets at quarterly intervals. In addition, the code of conduct on mortgage arrears, CCMA, sets out requirements for mortgage lenders dealing with borrowers facing or in mortgage arrears on their primary residences. The CCMA provides a strong consumer protection framework to ensure that borrowers are treated in a fair and transparent manner by their lenders and that long-term resolutions are sought by lenders with each of their borrowers. Under the CCMA, a lender may only commence legal proceedings for repossession after it has made every reasonable effort to agree an alternative repayment arrangement with the borrower or his or her nominated representative, and where specific timeframes have been adhered to, or where the borrower has been classified as not co-operating. It is clear that the Government has put in place a number of initiatives to assist homeowners in difficulty, including reform of personal insolvency legislation, the provision of independent advice to those dealing with debt issues and, as already stated, the introduction of MART targets and the revision of the CCMA.

The most recent ISI results show an increasing take-up of its services, albeit from a low base. For quarter 4 of 2014, the ISI reported that it was dealing with debt of €1.5 billion and that the number of personal insolvency arrangements approved in quarter 4 had increased by 148% over that for quarter 3. The ISI also reports that 75% of proposals are supported by creditors. The decision in 2014 to waive fees for the insolvency service, coupled with a targeted awareness-raising campaign, is likely to lead to greater engagement with the office.

Additional information not given on the floor of the House

My Department and the Central Bank monitor the situation in regard to mortgage arrears on an ongoing basis. Data published by the Central Bank in early March for the end of 2014 showed continued improvement in the number of personal dwelling house, PDH, accounts in arrears of greater than 90 days, which decreased by 7.4% over the quarter, representing the fifth consecutive reduction in the number of accounts in arrears for this category. In addition, the number of borrowers reaching agreements with their banks to restructure their mortgages is increasing, with almost 115,000 mortgages classified as restructured at end December 2014. It is also encouraging to note that approximately 85% of these restructured accounts are deemed to be meeting the terms of their current restructure arrangement.

This is, however, an area which remains under continuous review. More and concerted action is required by the banks to assist customers in arrears and, as the Taoiseach has previously announced, my Department is considering a range of options to support the existing framework and to improve the take-up of personal insolvency solutions.

Deputy Pearse Doherty

I thank the Minister for his reply. Unfortunately, it merely constitutes a list of the initiatives the Government has taken in the past, some of which have led to a weakening of the position of consumers. The point I was trying to get at is that there has been speculation in the media that the penny is finally dropping in Government Buildings to the effect that something must be done to tackle the large number of repossession cases coming before courts throughout the land and that further action must be taken regarding the 100,000 families in mortgage arrears. We are well aware that this crisis was not created by the Minister or the Government and that it first emerged on the watch of the previous Fianna Fáil Administration. However, the crisis has become twice as bad under the stewardship of the Minister and the Government. Is anything else being proposed to deal with this matter and is the Government considering bringing forward further legislation in respect of it? Is it considering other measures which might assist in dealing with the crisis or is it satisfied that initiatives introduced heretofore are sufficient?

Deputy Michael Noonan

As the Deputy is aware, the essential issue revolves around ensuring that there are sufficient procedures and initiatives available to allow mortgages to be restructured in a way that will see to it that they are affordable. Some 110,000 mortgages have already been restructured and significant progress has also been made across a range of initiatives. In the past month or so, the initiatives that are available to the banks have been reviewed in order to establish whether additional or modified initiatives that would work better might be put in place. Work in this regard is ongoing and an announcement on the matter will be made some time during the course of this month.

Deputy Pearse Doherty

I welcome the fact that a review is taking place. I am not familiar with this review and I presume that the views of those on this side of the House are not being solicited in respect of it. We, as Opposition spokespersons on finance, and the Joint Committee on Finance, Public Expenditure and Reform, have invested a great deal of time considering the position with regard to the mortgage arrears crisis. When commenting on the review, the Minister referred to the suite of options that will be available in terms of restructuring. Does the review encompass a consideration of the powers that could be extended to the courts to deal with banks that are vetoing personal insolvency arrangements? Will the review be examining the position with regard to the bankruptcy rules and reducing the three-year term of bankruptcy to one year? The House is due to take Report Stage of the Personal Insolvency (Amendment) Bill 2014. Is the Government considering using this legislation to bring forward amendments to deal with the length of the term of bankruptcy or to stipulate what the courts may take into account when issuing repossession orders?

Deputy Michael Noonan

As the Deputy is aware, a menu of options is available to the lending institutions and mortgage holders in the context of restructuring mortgages. Some of these initiatives suit particular mortgages holders while others do not. One of the quite frankly disappointing aspects of this matter is the low level of take-up in respect of the personal insolvency legislation. However, the position in this regard is improving and I understand that the take-up figures are now comparable with those which obtained in the UK when insolvency legislation was introduced there. The insolvency regime and how it applies, and the other issues raised by the Deputy, are all contemplated by the review being conducted primarily by the Department of Finance. The views put forward by Deputies in this House and at the Joint Committee on Finance, Public Expenditure and Reform will, of course, be taken into account. The views of the Deputy and others are not secret and we are quite well aware of them.

I must sound a note of caution. It is possible that we could take initiatives which might make matters worse. As a result, we want to ensure that those we do take will be positive in nature and that they will contribute towards an overall solution. It is not the case that the options currently available have failed, but there is no doubt that they can be enhanced. As already stated, 110,000 mortgages have been restructured, and this represents significant progress. However, there is a residue in respect of which an enhanced range of options might provide assistance. As stated, I expect announcements on this matter to be forthcoming during the coming month.

An Leas-Cheann Comhairle

Question No. 3 is in the name of Deputy Donnelly. As the Deputy is not present, we will move to Question No. 4 in the name of Deputy Michael McGrath.

Personal Debt

Michael McGrath

Ceist:

4. Deputy Michael McGrath asked the Minister for Finance his views and those of his Department on the proposed reduction in the discharge period from bankruptcy; if his Department is planning to introduce new measures to deal with the issue of mortgage arrears; and if he will make a statement on the matter. [13403/15]

Deputy Michael McGrath

I am seeking the views of the Minister and the Department of Finance on the proposed reduction in the discharge period for bankruptcy. As the Minister is aware, this matter has been the subject of much recent discussion in the aftermath of the publication of a Private Members' Bill by Deputy Penrose. While this matter may relate more directly to the Department of Justice and Equality, I tabled the question in order to give the Minister the opportunity to outline his views and those of his Department, because they are absolutely crucial to the debate on it.

Deputy Michael Noonan

While, as the Deputy states, this issue falls within the functional responsibility of my colleague, the Minister for Justice and Equality, Deputy Fitzgerald, he will be aware that the duration of bankruptcy was reduced from 12 years to three in December 2013. Insolvency Service of Ireland data indicate that for all of 2013, 58 people were adjudicated bankrupt by the High Court, whereas in 2014 the number adjudicated bankrupt rose to 448.

It can be anticipated that this number will continue to increase in 2015. This demonstrates that the reduction in the bankruptcy term is having a positive impact as a mechanism of last resort in dealing with distressed debt situations. However, more time is needed to assess the effectiveness of this measure. Recently, there have been calls in the media to reduce the bankruptcy term down to one year, with the rationalisation that this will allow entrepreneurs to regularise their debt situation quickly with a view to facilitating them in establishing a new business. Alternatively, it is suggested that reducing the bankruptcy term will enable individuals to write down debt without having to leave their family home.

Bankruptcy is a big step for borrowers and one that may not deliver the desired result of retaining the family home. It is my understanding that of those who had a family home and were declared bankrupt in 2014, approximately 70% have lost or are expected to lose their home. Banks are the best protected creditors in bankruptcy.

Currently there is a lack of analysis of unintended consequences around further reducing the bankruptcy term to one year. I would be concerned that if we act in haste on this issue, without having conducted rigorous analysis of the objectives and impacts of such a change, we may not achieve the best outcomes for entrepreneurs or private individuals.

When this analysis has been completed, the Government will then have all the facts on likely consequences, both good and bad, and will be in a better position to make an informed decision on whether the bankruptcy term should be reduced from three years to one year.

Additional information not given on the floor of the House

The Deputy may rest assured that tackling mortgage arrears is a priority for the Government. A whole-of-Government approach has been adopted in addressing the issue with a view to maximising the level of loan restructuring arrangements and minimising the number of home repossessions. Initiatives such as the reform of personal insolvency legislation and the establishment of the Insolvency Service of Ireland, the introduction of a mortgage arrears information and advice helpline, and the availability of the mortgage-to-rent scheme, ensure that borrowers are assisted in dealing with their arrears.

Significant progress was made in 2014 in restructuring mortgage accounts. Data compiled by the Central Bank on residential mortgage arrears show that the number of PDH mortgage accounts of greater than 90 days is declining. This is, however, an area that remains under continuous review. More and concerted action is required from banks to assist and restructure customers in arrears and, as the Taoiseach has previously announced, my Department is considering a range of options to support the existing framework and improve the uptake of personal insolvency solutions.

Deputy Michael McGrath

I thank the Minister for his reply. We are all aware of the dramatic increase in the number of people going bankrupt in Ireland. Many people have gone to the UK to become bankrupt. The Minister has put a number of important facts on the record, including that 70% of those who went bankrupt in 2014 have lost, or will lose, their home as part of the bankruptcy process. It is a pretty sobering statistic for everyone to remember.

I have an open mind on the reduction of the discharge period, but it should not be the solution of choice for tens of thousands of people in mortgage arrears. I do not believe it is, quite frankly, because bankruptcy is a serious measure with significant consequences for those involved. In most arrears cases, there is a joint mortgage involving joint ownership of the property. If both spouses have to go bankrupt, it is not the most efficient way to deal with mortgage arrears. It may well be a worthwhile step for those who have more complex debt arrangements involving corporate and commercial debt, for example, but not for those in mortgage arrears.

The Minister referred to the need for more time to assess the impact of the recent reduction from 12 years to three years. He also referred to an analysis that has to be done. Perhaps the Minister can clarify if a particular initiative is under way to analyse the impact of the reduction from 12 to three years. If so, is there a timeline for completing it?

Deputy Michael Noonan

The issue of reducing the term of bankruptcy from three years to one year is separate from restructuring mortgages, and should be seen as such. By mixing both issues one could end up making a decision which would not be helpful. If somebody has mixed debt, the only institution that has security is the bank because it has the deeds of the home and is underpinning the mortgage. Therefore the banks are in a good position if part of the mixed debt is a mortgage. This is why repossession occurs in so many cases. Most of the repossessions I referred to are voluntary in working out the bankruptcy.

As to the Deputy's precise question, officials in my Department keep these matters constantly under review and will advise me on them. We are not working to a particular timeline, but we are collecting the relevant data. I presume that some of the data will be put into circulation in due course, later on.

If there are merits in reducing the three-year bankruptcy period to one year, as has been done in other jurisdictions, that is a separate policy consideration from resolving the mortgage crisis. It does not resolve the mortgage crisis and, in fact, the data would suggest that persons who enter bankruptcy lose their homes more than people who do not.

Deputy Michael McGrath

As I have said on a number of occasions, I do not believe people in mortgage arrears should have to go bankrupt in order to have their indebtedness dealt with and to have a restructuring of their mortgage agreed. We need to separate both issues - mortgage arrears and the decision whether or not to reduce the bankruptcy discharge period further. People whose main debt is a mortgage on the family home should not have to go bankrupt. Let us be honest about it, they should not have to go bankrupt to have that situation dealt with. I welcome the Minister's comments in that regard.

The debate on reducing the discharge period has been gaining some momentum, yet the Minister seems to be pouring cold water on it. It would appear from what the Minister has said that no decision is imminent from the Government in favour of a reduction in the discharge period. The fact that 70% of those who went bankrupt in 2014 have lost, or are expected to lose, their family home as part of the discharge of their bankruptcy, is a sobering statistic. People who are advocating a reduction in the discharge period as a measure for dealing with mortgage arrears should bear that statistic in mind.

Deputy Michael Noonan

The issue of reforming the bankruptcy laws is fairly recent. The former Minister for Justice and Equality, Deputy Shatter, brought in legislation reducing the period from 12 to three years. At the time, the three-year period was not picked arbitrarily. Other options were considered, including the one-year option which is now the norm in Britain and Northern Ireland. Therefore, there has been recent consideration of what the appropriate term of bankruptcy should be in this jurisdiction. Data is now coming through which show how the changes are working out. The clearest change so far is that it has gone from 58 bankruptcies in the last year of the old legislation, to 448 now. There is quite a clear uptake by those availing of bankruptcy under the new terms of the Act.

Not all the implications have been assessed yet, but I welcome the debate. I know that a Private Members' Bill has been published, so we can continue the debate. I do not have a particularly fixed position on it. If another term works better, so be it, but I would like to have it evidence-based rather than change being made for the sake of it and on the basis of a lack of evidence.

An Leas-Cheann Comhairle

As Deputy Donnelly has arrived, we will now go back to Question No. 3.

Mortgage Data

Stephen Donnelly

Ceist:

3. Deputy Stephen S. Donnelly asked the Minister for Finance his views that bank profit on individual restructured mortgages, including those where banks are seeking possession, should be capped at the expected level under normal payment of the mortgage; if so, if he will legislate accordingly; and if he will make a statement on the matter. [13255/15]

Deputy Stephen S. Donnelly

This question concerns the fact that in many restructurings of distressed mortgages, banks are making more money than they would have had the mortgage not been restructured. For example, the Committee on Finance, Public Expenditure and Reform went through the Bank of Ireland's restructures. The bank's chief executive admitted that in at least 90%, and probably a lot more, of the mortgages the total amount being paid back by the borrowers was more. Therefore, term extensions and capitalisation of arrears led to more. It is particularly depressing right now with the courts becoming filled up with orders for repossession from banks. We are aware that in many cases the banks are making more money out of these mortgages than they would have had they been functioning normally. Does the Minister agree that this should not be happening and, if so, can he legislate accordingly?

Deputy Michael Noonan

I thank the Deputy for his question.

The consumer protection code and the code of conduct on mortgage arrears, CCMA, have in place a number of measures to protect financial consumers. On a general level, regulated lenders are required, in their interaction with their customers, to act honestly, fairly and professionally in the best interests of their customers. Utilising the mortgage arrears resolution process, there is a requirement on the lender to assess each case of mortgage difficulty on its own merits and also to proactively work with the borrower in order to address a case of genuine mortgage difficulty.

If a borrower is dissatisfied with the decision of the lender in this area, the appeals framework as set out in the CCMA will be available. Also, where appropriate, independent financial advice will be available to the borrower under the protocol for independent advice to borrowers availing of long-term mortgage forbearance.

Specific provisions in the CCMA, which are designed to protect borrowers in genuine mortgage difficulty, include that except in the very limited circumstance set out in the CCMA, a lender must not require a borrower, as part of an alternative repayment arrangement, to change from an existing tracker mortgage to another mortgage type; and lenders are restricted from imposing charges and-or surcharge interest on arrears arising on a relevant mortgage in arrears unless the borrower is not co-operating. While it is unfortunate that there are cases of mortgage difficulty and that this gives rise to certain difficulties and costs for the parties involved, it is nevertheless a very welcome development that many parties are in a position to agree and put in place sustainable alternative arrangements in order to address such a difficulty. The latest data from the Central Bank and my Department indicate that an increasing number of mortgage restructures are being put in place in order to deal with mortgage difficulty with almost 115,000 principal dwelling house, PDH, accounts being classified as restructured at the end of December. It is also encouraging to note that 85% of such accounts are deemed to meet the terms of their current restructure arrangement. I would encourage lenders and borrowers in difficulty to continue to build on this and to reach acceptable and sustainable solutions to mortgage difficulty.

Deputy Stephen S. Donnelly

I hope the Minister will agree that the answer which was scripted is boilerplate stuff and does not address the question I raised, which relates to the fact that the majority of restructures increase the level of profitability to the bank from the restructures, although not in all cases. As an example, the chief executive of Bank of Ireland has admitted to the committee on the record that more than 90% of Bank of Ireland restructures result in higher overall payments to the bank. For a great many restructures, including repossessions, the banks are making more money than had the loan been discharged. Let us ignore the CCMA and other such considerations, but, as a principle, does the Minister agree that in those cases the banks should not end up with a higher profit than had the loan been discharged normally? If the Minister agrees with that, would he be open to exploring legislation with the committee to that effect?

Deputy Michael Noonan

I will outline the remainder of the reply which I did not have time to read. In relation to the proposal suggested by the Deputy, I am not convinced how workable a solution it may be, but it appears to be the case that many of the properties that banks are moving to repossess have been carrying arrears for some significant period and would be sold for a lower valuation than the original mortgage.

Mortgage arrears is, however, an area that remains under continual review. More and concerted action can be undertaken by the banks to assist customers in arrears and as the Taoiseach has previously announced, my Department is considering a range of options to support the existing framework and to improve the uptake of personal insolvency solutions.

Deputy Stephen S. Donnelly

Perhaps I could ask the Minister to stop reading out the prepared stuff from the civil servants because it does not address the question I asked, which is whether he as Minister for Finance believes that, as a principle, the banks should not make additional profits on restructured mortgages. If he agrees with that as a principle, would he be open to working with the committee to draft legislation to that effect? This is something Government Deputies and people within the banks have raised. It is a principle that says the banking sector is partly responsible for what happened and it should not make excess profits on irresponsible lending. They are making profits on the arrears, recapitalisation and term extensions. They are making additional profits over and above the expected net present value of the loans. Should we, as elected representatives, say it is fine for the banks to make the money they would ordinarily have made but they cannot make additional profit on the behaviour that caused the problem in the first place?

Deputy Michael Noonan

The Deputy is expressing a very narrow view of profitability. It seems to me that if a lending institution has a mortgage in arrears, for the period of the arrears it is losing a lot of money from the original contract position. I am not sure what Deputy Donnelly is saying about profits. The restructuring should help both parties, the borrower and the lender, and it should arrive at a new position which is sustainable. I cannot see where the argument arises that this leads to extra profits for the bank, unless the Deputy is arguing that when the mortgage is in arrears, its saleable value is so low that only that amount should be realised by the bank-----

Deputy Stephen S. Donnelly

No.

Deputy Michael Noonan

-----not the nominal value of the mortgage.

EU Budgets

Pearse Doherty

Ceist:

5. Deputy Pearse Doherty asked the Minister for Finance if he will provide an update on negotiations regarding the expenditure benchmark and the application of European Union budgetary rules with his European Union colleagues; the aims of these discussions; and when he expects an outcome. [13307/15]

Deputy Pearse Doherty

Baineann an cheist seo leis na díospóireachtaí atá ar siúl sa Bhruiséil ó thaobh na expenditure benchmark rules. The Fiscal Advisory Council's report on the rules issued this morning, which will be a helpful addition in terms of the Minister's negotiations with his European partners. Could he outline to the House the status of the talks and the impact on the budget if the expenditure benchmark rule is changed, as this country has requested? What leeway would it give on expenditure?

Deputy Michael Noonan

From 2016, the public finances in Ireland will be subject to the rules of the preventive arm of the Stability and Growth Pact. Assessment of compliance with the rules of the preventive arm is based on two pillars, the annual improvement in the structural balance and the expenditure benchmark. The expenditure benchmark links growth in expenditure to the potential growth rate of the economy. Additional expenditure above the benchmark has to be paid for through the introduction of new discretionary revenue measures. The benchmark also contains a feature that is designed to assist with achieving the minimum annual structural improvement of more than 0.5% of GDP.

I have raised on a number of occasions, including at the recent Eurogroup meeting, the use of outdated estimates of growth in the calculation of the expenditure benchmark. At the moment, the reference rate used in the calculation of the expenditure benchmark is based on a ten-year average of potential growth that is updated every three years. The reference rate to apply for 2014 to 2016 was calculated in 2013 when both the outturn and outlook for our economy's growth potential were considerably weaker. The use of such outdated estimates could lead to inappropriate fiscal decisions being made.

On foot of my interventions at political level, my officials have been in discussions at a technical level with the European Commission and other member states. The aim of technical discussions has been to ensure that the methodology for calculating potential output and its implementation in the context of EU fiscal rules is applied in a manner that produces credible results that underpin the operation of a sound set of rules. The focus of our discussions has been two pronged; first, to improve how estimates of potential GDP are calculated for Ireland by using more appropriate population projections and, second, to apply the calculations in a more logical fashion so that the fiscal policy consistent with the rules is set based on latest available information regarding both the outturn and prospects for the Irish economy.

Discussions are progressing well but final decisions at a technical level must be endorsed at the relevant committees. While I do not want to prejudice the ongoing discussions, I welcome the strong engagement of the Commission on this issue. Finally, I emphasise that I support the revised fiscal rules. What I seek from the Commission and colleagues from other European states is a more sensible application of the rules for all member states as this will enhance the credibility of fiscal policy decision making.

Deputy Pearse Doherty

If it were not so serious one would laugh. The Minister was one of the architects of the rules and the first time they apply to this country is now, and we are over with the begging bowl asking to get rid of some rules that are simply not sensible. I agree with the Irish Fiscal Advisory Council's report that there is an anomaly in the rules and they need to be changed. It is not only the rules that must be considered as other issues must be taken into account such as the calculation of structural deficits and structural surpluses that will cause problems in the future. There is suspicion that this is happening as a result of it being an election year, that the Government has implemented all of the austerity rules and policies but given the impending election and the fact that it has committed to reducing the income tax rate for top earners, under the current rules the expenditure benchmark would not allow that to happen, and that the measure is very much geared towards election commitments.

The Minister said the matter must be agreed by committees in Europe. Is it expected that we will have a decision before the April statement?

If it is not expected, does the Minister expect to base the April statement on what he is seeking from Europe, which is the revised expenditure benchmark rate?

Deputy Michael Noonan

I want to make it clear that I and the Government believe in the rules that stem from the Stability and Growth Pact. The issue is that when rules are applied to give bizarre or peculiar results, the application of the rules needs to be examined. For example, technical people in the European Commission looking at migration patterns from 2008 for three years or so, when migration was very strong, came to the conclusion that the Irish population would decline by a million by 2030 and built expenditure loans around that. That is nonsense; it is not going to happen and it is quite clear that population trends now negate that. Some kind of theoretical, bizarre interpretation of economic data cannot be the base for applying the rules. The second issue is that as a general expenditure rule, sovereigns should keep their increase in expenditure below their net growth rates. That gave another bizarre result for us because of the averaging over ten years. There is an argument that for 2016 we must keep our expenditure increase below 0.6% on the basis that the growth average is 0.6%. Quite obviously that is not the current growth rate, and I welcome the paper produced by the Fiscal Advisory Council, which casts independent light on this issue. It has moved the expenditure benchmark up to 1.8%, which gives a certain amount of room.

On the last question the Deputy asked, I would hope to see further clarification of this in the spring statement.

Deputy Pearse Doherty

I welcome the fact that it will be there before the spring statement. The expenditure benchmark is something I have been raising with the Minister and his Department for a long time now. The Minister's legacy when it comes to how he deals with some of the economic data is that it is about keeping the Opposition in the dark. We have been raising this for the guts of a year and finally, at the foot of an April statement, the Government is starting to deal with the issue.

The Minister presented me with figures last year whereby the expenditure benchmark would currently allow him a leeway of about €400 million in additional expenditure. Obviously, if he reduces taxes as he has planned, the €400 million would be absorbed and there would be no expenditure increases. This morning on "Morning Ireland" the Fiscal Advisory Council suggested that the rules, if granted, would allow him about €700 million of leeway, which could be further enhanced with drops in unemployment. Does he concur with that statement?

The council has also very strongly cautioned against decreases in income tax as a result of increased pressures on health, education and pensions. Can the Minister give us any indication of whether he is going to adhere to the Fiscal Advisory Council's strong suggestion that discretionary income tax reductions should be avoided and instead focus on those areas where is there growing pressure?

Deputy Michael Noonan

I always listen to the advice of the Irish Fiscal Advisory Council, which is independent and gives its advice freely without any influence of the Government being brought to bear on it. We will follow the same approach on this occasion. It is a long way to the budget but we will be laying out the parameters of where I think the economy is going to go in the spring statement.

The Deputy has indeed brought up the expenditure benchmark on a number of occasions, but we have given him as much information as we have on all occasions. I would think that in comparison with the situation under other Administrations, the flow of necessary financial data to individual Deputies and to the finance committee is very strong. We have been quite transparent on these issues and can arrange for further briefing if that is necessary.