Dáil Éireann díospóireacht -
Thursday, 23 Nov 2023

Vol. 1046 No. 3

Ceisteanna ar Sonraíodh Uain Dóibh - Priority Questions

National Treasury Management Agency

Pearse Doherty

Ceist:

79. Deputy Pearse Doherty asked the Minister for Finance the total value and number of investments made by the Ireland Strategic Investment Fund in companies or enterprises that operate in illegal Israeli settlements in the occupied territories and, respectively, companies or enterprises that have been included on the UN database of companies operating in illegal Israeli settlements on Palestinian land, which was published by the United Nations Human Rights Council resolution 31/36; and for an update on engagements the Minister or his Department have had with ISIF with respect to divesting from said companies. [51791/23]

Deputy Pearse Doherty

Over the past month and more we have been witness to the cruel and vicious bombardment of the Palestinian people in Gaza together with increased attacks, intimidation and brutality in the West Bank. These events have underlined the need for the State to do everything in its means and use everything at its disposal to hold the Israeli regime to account on behalf of the Palestinian people. We have legislation calling for divestment in the illegal settlements by Israel. Will the Minister update the Dáil his engagement with the NTMA and Ireland Strategic Investment Fund, ISIF, regarding divestment from companies operating in illegal Israeli settlements in the occupied territories?

Minister for Finance (Deputy Michael McGrath)

The NTMA has advised that its annual report for 2022 discloses ISIF’s shareholdings and contains, as at year end 2022, 11 companies which appear on the UN Human Rights Council database of business enterprises involved in certain activities related to the Israeli settlements in the occupied Palestinian territories as published by the UN Human Rights Council in February 2020 and updated in June 2023. The NTMA has advised me that ISIF constructs its portfolio within the legislative framework set for it by the Oireachtas.

When the Private Members' Illegal Israeli Settlement Divestment Bill 2023 was initiated in the Dáil, the Minister of State outlined the State’s position with regard to the policy of differentiation that the State adopts vis-à-vis Israel and the territories occupied by Israel since 1967. Ireland’s general position with regard to the occupied territories is very clear. In the debate on the Bill in May this year, the Minister of State also raised a number of specific concerns about the content and approach proposed in the Bill.

In that context, the Office of the High Commissioner on Human Rights issued an update to the UN database of businesses operating in illegal Israeli settlements on 30 June this year. In publishing the update, the UN said that it did not purport to provide a complete list of business enterprises engaged in certain activities in relation to Israeli settlement activity in the occupied Palestinian territory. The update, which was also resource constrained and limited only to a review of those companies already listed, resulted in 15 companies being removed from the database.

As the Deputy is aware the Dáil agreed a nine-month timed amendment on 15 May to consider the issues raised by the Private Members' Bill brought forward by his party. This was to allow for consideration of the issues raised by that Bill. That timed amendment will expire in mid-February 2024 and I understand it is then a matter for the Oireachtas as to how the Bill will proceed. I will add furhter remarks shortly on the work we are doing with the NTMA and ISIF on the issues raised.

Deputy Pearse Doherty

In the past number of weeks, we have seen this play out in front of our eyes on our television screens and on social media. We have witnessed actions by an Israeli regime that break all moral and, indeed, legal codes. We have a moral obligation to act, and there are steps that can be taken. In March, before the humanitarian crisis unfolded, Sinn Féin brought legislation before the House, which would require the NTMA to divest the assets in the ISIF of companies that operate within the illegal Israeli settlements in the occupied Palestinian territories. The Minister said there were 11 on the list. That is in line with a UN database of companies operating within these illegal settlements. While it is not the intention of the staff of the NTMA or ISIF to support companies there, it is simply not acceptable that taxpayers' money is being invested in companies that are propping up the economic activities of illegal settlements that breach international law and the dignity and rights of the Palestinian people, and it needs to end. The Minister is in the driving seat and he needs to bring it to a conclusion. What is the total value of taxpayer money invested in the 11 companies that are operating in the illegal settlements in the occupied territories?

Deputy Michael McGrath

The reply the Deputy will receive sets out a table drawn from the NTMA annual report. It gives a total over just under €4.2 million. My Department has been working with ISIF on the most appropriate way to address issues raised by the Deputy and the Private Members' Bill, including in the context of the forthcoming future Ireland fund and the infrastructure, climate and nature fund.

I have also written to the CEO of the NTMA and to the Chairman of the Joint Committee on Foreign Affairs and Defence to seek their views. My officials had an engagement with the committee to discuss the issue. This process will allow the Government to determine the most appropriate approach to adopt on this matter. I am aware that this is a difficult situation to resolve and that it does requires time and careful consideration to get right. The timed amendment approach has provided some space to consider the intent of the Bill. I am working through the issues which arise with the legal advisers, the NTMA and ISIF and I intend to discuss this matter with the Government very shortly.

Deputy Pearse Doherty

The lack of urgency on this by the Government is startling. We brought forward the legislation and it decided to stall it for nine months. That nine months is up in January and there is still no plan from the Government. In the meantime, bombs have rained down on the people of Gaza.

We have seen the destruction of hospitals and civilian infrastructure, and the destruction and targeting of schools. We have seen the deaths of thousands of women and children. We have seen the victims of war crimes right before our eyes. In the West Bank, Israeli settlers have stepped up their campaign of intimidation, dispossession and violence, aided and abetted by Israeli security forces. Our proposed legislation underlines that Ireland is saying it will not invest millions of euro of taxpayers' money to prop up that type of activity as regards illegal settlements in the occupied territories.

This should not take nine or 12 months or whatever. We need action on this. I ask that the Government works with Sinn Féin's aim to divest any assets the State has invested in companies operating in illegal settlements in the occupied Palestinian territories. Will the Minister commit to bringing that about? Will he say that we will find a way to make sure that no taxpayers' money is being invested in companies that are operating in illegal settlements in the occupied Palestinian territories?

Deputy Michael McGrath

It is important we take a comprehensive approach to examining this issue. The UN acknowledged that the list it published was not complete or exhaustive. ISIF's policies in respect of environmental, social, and corporate governance, ESG, have demonstrated an ability to invest ethically. For example, under the Fossil Fuel Divestment Act 2018, at the end of last year, the fund had developed a list of 243 fossil fuel companies in which it will not invest. In addition, the fund also maintains an exclusionary strategy around cluster munitions and anti-personnel mines, which are prohibited under the Cluster Munitions and Anti-Personnel Mines Act, coal production and processing, tobacco manufacturing and direct investment in companies involved in the manufacturing and testing of nuclear weapons or their critical component parts.

I am actively working on this issue. I am engaging with the NTMA and ISIF. We have engaged with Oireachtas committees through my officials. I will bring this matter to the Government shortly.

Vehicle Registration Tax

Denis Naughten

Ceist:

80. Deputy Denis Naughten asked the Minister for Finance if he will consider reviewing the rate of VRT that applies to cars with advanced driver-assistance systems technologies that assist drivers in driving and parking functions and, as a result, dramatically reduce road traffic accidents; and if he will make a statement on the matter. [51596/23]

Deputy Denis Naughten

During Science Week, the Oireachtas heard presentations from Professor Martin Mullins from the University of Limerick and Professor Martin Glavin of the University of Galway on the huge potential to reduce traffic accidents through driver-assisted technology in cars. They have made a very strong argument for tax incentives to make this happen. Will the Minister consider this in the interests of reducing road deaths in Ireland?

Deputy Michael McGrath

I thank the Deputy for raising this issue. He should note that vehicle registration tax is an emissions-based tax calculated on the value of the car. There is no specific VRT rate for cars with this type of technology.

Under the Finance Act 1992, VRT is assessed on a vehicle at the time of registration in the State and the way it is calculated depends on the category of the vehicle involved. VRT on category A vehicles, generally passenger cars and certain special utility vehicles, is based on the vehicle’s value and its emissions level, with higher charges for higher emitting vehicles of the same value. There are two components of the VRT charge for these vehicles, relating to their carbon dioxide, CO2, and nitrous oxide, NOx, emissions. The CO2 component of the VRT charge is calculated by multiplying the value of the vehicle - its open market selling price - by a percentage from a 20-band table, with the vehicle’s CO2 emissions level determining which band applies. Vehicles with the lowest CO2 emissions fall into band 1, charged at 7%, while those with the highest emissions fall into band 20 charged at 41%. The NOx component of the VRT charge is calculated using a progressive scale, starting from €5 and rising to €25 per mg/km of the vehicle’s NOx emissions level. The VRT for category B vehicles, generally light commercial vans, is 13.3% of the value of the vehicle. There is a flat VRT charge of €200 for category C vehicles, which include larger commercial vehicles, agricultural tractors and buses.

The appropriate category is decided at the time of registration based on the vehicle’s technical categorisation under EU type-approval law, taking account of the documentation presented at the time of registration. The classification of vehicles for VRT purposes reflects to a significant degree the categories used for the EU classification of vehicles as set out in EU legislation, particularly those relating to the type approval of passenger vehicles, two- and three-wheeled motor vehicles, and agricultural or forestry tractors. All vehicles must have type approval and the National Standards Authority of Ireland is the Irish type-approval authority. The changes made to VRT structures in recent years have been focused on incentivising the uptake of low-emissions vehicles. The overall approach to tax policy is kept under review as part of the tax strategy group, TSG, and the budgetary cycle.

In summary, VRT is determined by the type and emissions value of the car, as per the recent changes made to the VRT structure. No account is taken of features in cars, such as advanced driver assistance technologies, which can assist drivers in driving and parking functions. Additionally, there is no mechanism by which VRT is applied to vehicles on the basis of safety or likelihood of the vehicle being involved in road traffic accidents.

Deputy Denis Naughten

I have two young transition year students in the Gallery this week. I am sure they have now just got a perfect example of how to spend four minutes answering a question without actually answering the question that has been put. I thank the Minister for that education. I would like him to answer the question I put to him. Will he consider looking at the issue of vehicle registration tax to try to drive an increase in road safety standards in this country? In 2022, we had the highest number of deaths on our roads in six years. Sadly, it is very likely that 2023 will surpass this figure. There is absolutely no doubt that more enforcement is needed on our roads but the technology available also needs to be used. Based on UK data, it is estimated that automated vehicle technologies, for example, automated emergency braking, lane departure warning, and adaptive cruise control, combined, could reduce accidents by up one quarter. Will the Minister examine this?

Deputy Michael McGrath

I thank the Deputy. The TY students are very welcome. I hope they enjoy their visit to Leinster House. To answer the question directly, we are open to examining what changes might be appropriate to the VRT system in a way that helps all our collective efforts to reduce accidents on our roads and the level of fatalities, which have unfortunately been going in the wrong direction in recent times. It behoves all of us to be open-minded in examining what we can do by using new technology to reduce the risk of accidents, and to incentivise the use of vehicles that help to protect drivers and passengers, which will help to highlight oncoming dangers and the risk of collisions that can impact on cyclists, pedestrians and so on. The answer to the Deputy's question is "Yes". I am open to examining what changes might be appropriate. I look forward to working with him in that regard.

Deputy Denis Naughten

Every car that goes onto Irish roads should have automated emergency braking, lane departure warning, blind sport detection and drowsiness and attention detection. Those four measures alone would have a significant impact on road traffic deaths. Based on UK road safety reports for 2019 and research that was carried out on that, those types of measures would reduce skidding and overturning accidents by 41%, and pedestrian accidents by 28.4%. Sadly, to date this year, we have had 38 pedestrian deaths on our roads, which are the highest figures in 15 years. If these measures were introduced on our roads, they would reduce the number of those pedestrian deaths by 11 so far this year. These are people who would be alive and walking around today if we had this type of technology on Irish roads.

Deputy Michael McGrath

We have seen far too many tragedies on Irish roads in recent months. There is not a household in the country that has not been impacted in terms of at least knowing somebody who has lost their life or who has been subjected to horrific injuries as a result of a road traffic accident. I have seen far too many of them in my community.

I assure the Deputy that any policy that helps reduce the risk and leads to reduced accidents and fewer fatalities on our roads is one I will support. The system of taxation we employ for vehicles can play a role. Some of the issues raised by the Deputy are relevant to other Departments that lead on policy on this area, in particular the Department of Transport. The Minister for Transport and the Minister of State at the Department are examining what more can be done to reduce the accidents.

Deputy Denis Naughten

There is a priority question to them next week.

Deputy Michael McGrath

I am sure there is. I am happy to work with the Deputy on his specific proposal.

Tax Code

Pearse Doherty

Ceist:

81. Deputy Pearse Doherty asked the Minister for Finance for his and his Department's analysis of the estimated deadweight loss associated with the rented residential relief; its implications for social equity within the taxation system; and if he will make a statement on the matter. [51792/23]

Deputy Pearse Doherty

As we have discussed previously, in the recent budget the Minister introduced a tax break for landlords of €600 next year, going up to €1,000. It was an unprecedented step in our tax code and raises fundamental concerns around equity and fairness. Another key issue is the purpose of this tax break, who will benefit and why it is necessary. Can the Minister inform the Dáil of the deadweight loss associated with this tax break for landlords?

Deputy Michael McGrath

Landlords are an essential feature of a functioning housing market. Rising rents are driven by a shortage of supply so stabilising and increasing the supply of rental properties should ease upward pressure on rental prices and make it easier for prospective tenants to find affordable homes.

The new residential premises rental income relief is a tax relief at the standard rate of 20% against private rented residential income. The purpose of this relief is to provide an incentive for landlords, specifically targeted at attracting and retaining small-scale landlords in the private sector. The relief will be targeted, with €3,000 in the tax year 2024, €4,000 the following year and €5,000 in 2026 and 2027. This will equate, in effect, to a tax credit of up to €600 in year one, €800 in year two and €1,000 in years three and four. The relief is capped at the individual’s tax liability on rental income from residential property.

The risk of deadweight was considered as part of the process of creating this relief and it was determined, as with most tax reliefs, that there is a risk of deadweight. However, I believe that on balance this measure is worth implementing and is necessary to retain small-scale landlords in the rental market. To mitigate the issue of deadweight as much as possible, this relief is targeted and is only available for the tax years 2024 to 2027, is capped at the individual’s tax liability on rental income from residential property and relates only to tenancies registered with the Residential Tenancies Board or where a landlord leases a property to a public authority.

In terms of social equity, Ireland has one of the most progressive systems of taxes and social transfers of any EU or OECD country, which contributes to the redistribution of income and to the reduction of income inequality. My Department undertook a distributional analysis of the tax and welfare measures announced in budget 2024, which demonstrated that the overall core budget package was progressive.

Deputy Pearse Doherty

It is difficult to see this tax break as anything other than an expensive sop to landlords. That is why Professor Barra Roantree, formerly of the ESRI, described this tax break as "Maybe the stupidest tax relief of recent times", with the vast majority going to landlords who never even thought of leaving the market. The Minister says there is a risk of deadweight. Is he telling me that he has not even calculated the deadweight? He probably does not want to calculate the deadweight because it is absolutely massive. He should consider the view of his own Department, which noted this year:

Finally, taxation of rental income is often cited as a push factor for Buy-to-Let investors. In fact ... the way in which rental income is treated for tax purposes hasn't changed. Personal rates of income tax have always applied to rental income.

In fact, landlords have benefited from changes to their personal taxation system every year for the past number of years. The fact is that the effective rate on landlords has fallen, not increased; it is actually dropping. Furthermore, the Department noted that accidental landlords are cashing out as house prices have soared and this tax break is going to do nothing to stop it. Is it not the case that this is an expensive sop to landlords that is not going to have any impact whatsoever on the rental market other than increasing the landlords' bank balances?

Deputy Michael McGrath

I think we can agree that we are witnessing the departure of a significant number of small-scale landlords from the Irish market. We need to have a functioning private rental market providing homes for individuals and families on an ongoing basis. When I look at the data, I can see the number of notices of termination that have been served. Over 24,000 were served from the third quarter of last year to the third quarter of this year and in the majority of instances the reason cited for the serving of the notice of termination was the intention of the landlord to sell the property concerned. The RTB data on the number of tenancies registered shows that in 2017 there were 313,000 tenancies registered with the RTB. The latest figures we have for 2022, based on a system of annual registration, stood at 246,000. That is a very significant reduction, which has resulted in a tightening of the rental market, making it more and more difficult for people to access accommodation in the private rental market. I believe this measure will help to retain some small-scale landlords in the market, providing homes in towns and villages around the country for tenants.

Deputy Pearse Doherty

The Minister's officials, experts and professors on the outside are telling him this is not going to work but he is going ahead with it because that is what his party does in terms of the interests of landlords. There is a perverse incentive in our tax code, which I addressed at the finance committee, that Fine Gael introduced many years ago and that encourages landlords to sell. All the different agencies and advisers are telling landlords to sell now and that now is the time to sell if they want to be tax efficient. That is because there is a CGT exemption for the thousands of homes that were bought between 2011 and 2014. If landlords bought a home in 2014 and held onto it until 2021, they would pay no CGT on the €200,000 average uplift on the property. If they sold it last year, they would have to pay €8,500. If they sell it this year, they will have to pay €15,000. If they sell it next year, it will be €23,000. The tax goes up every year. There is an incentive for landlords to sell. What the Minister has introduced with this €600 tax relief and the €1,000 it will increase to, which equates to hundreds of millions of euro in taxpayers' money going into landlords' pockets, is not going to work. His officials have told him that and expert, formerly of the ESRI, has told him that. Why does he continue to go ahead with this when the real issue here is Fine Gael's incentive for landlords to sell up, which is having an effect on hundreds of people? Hundreds of landlords have sold up as they benefit from this tax exemption.

Deputy Michael McGrath

We discussed that issue in detail on Committee Stage of the Finance Bill and I gave a commitment that the officials in my Department would examine it in the context of the TSG papers. On the issue of the supply of homes, we need to have a functioning private rental sector. We are providing approximately €5 billion of capital to build more homes, including public homes, cost-rental homes and affordable purchase homes, and the private sector is adding perhaps another €10 billion to that to build private housing in our country. We need to have rental accommodation available not just through institutional investors building big blocks of rental accommodation, and they have a role to play, but in small towns and villages around Ireland where we need one or two units around housing estates and in settlements so there is accommodation available. I believe this measure, which is a modest measure, will be a factor in helping to retain some small-scale landlords in the market who would otherwise be intending to leave.

Housing Schemes

Catherine Connolly

Ceist:

82. Deputy Catherine Connolly asked the Minister for Finance further to Parliamentary Question No. 100 of 5 October 2023, his plans for the phasing out of the help-to-buy scheme; the details of the analysis underpinning the decision to extend the scheme to the end of 2025; and if he will make a statement on the matter. [51364/23]

Deputy Catherine Connolly

I am back again on the help-to-buy scheme. I am specifically asking the details of the analysis underpinning the decision to extend the scheme and the plans for phasing it out. I ask that in the context of a scheme that was introduced with a value of €40 million. That was the annual estimate. That has risen to €181 million in 2022 and the total cost at the moment is bordering on €1 billion, at €890.8 million.

Deputy Michael McGrath

The scheme was introduced in 2017 with the purpose of assisting first-time buyers with the deposit required to purchase or self-build a new house or apartment to live in as their home. The relief is only available in respect of new builds, with a view to increasing the supply of new housing and stimulating demand. To date, the scheme has been a significant support for first-time buyers of new homes. As of 1 November 2023, some 42,885 first-time buyers, either singly or as part of a couple, had benefited from the scheme.

As the Deputy will be aware, the Finance Bill will extend the help-to-buy scheme for a further year to the end of 2025. The scheme is also being amended to enhance its interaction with the local authority affordable purchase scheme.

This amendment will enable the use of the affordable dwelling contribution received through the affordable purchase scheme for the purpose of calculating the 70% loan-to-value requirement, thereby facilitating access for a greater number of affordable purchase scheme purchasers to the help-to-buy scheme.

The Deputy has previously raised concerns regarding the potential for the scheme to exacerbate housing prices. As has previously been stated, policymakers were aware at the time the scheme was being developed that it was not without risk. Likewise, they were aware there was a danger that, against a background of constrained supply, the initiative could serve to increase prices for new homes, thus potentially undermining to some extent the affordability aspiration of the scheme. However, on all occasions when the matter was formally examined to date, concerns in this regard were not borne out by the review data.

Studies carried out by Indecon economic consultants found the main driver of house prices was the mismatch between supply and demand, rather than the existence of the scheme. Similarly, the review by Mazars in 2022 found that there is no definitive evidence that help to buy pushed up the price of new homes. In fact, Mazars found that the prices paid for new homes by people who received help-to-buy relief were slightly lower than new house prices in the economy in general, likely because of the €500,000 price eligibility cap.

There have been significant changes in the market since the Mazars report on the scheme was published. The increase in interest rates in the intervening period means further stability and certainty is needed for first-time buyers who may now face higher mortgage interest rates.

Deputy Catherine Connolly

I thank the Minister for his reply. He quoted Mazars in relation to a lack of evidence. The report said there was no definitive evidence. It stated: "The scheme is poorly targeted with respect to incomes, location, house prices and other socioeconomic factors." Will the Minister comment on that part of the report?

The report also states: "As a result, it has socially regressive impacts, there is a considerable deadweight associated with the expenditure, and it is poorly aligned with spatial policy." It goes on and on, stating, "The sort of policy uncertainty that has arisen [as a result of] ongoing ... extensions without a clear picture of the longer-term ... environment is undesirable." It states: "A rational approach would not design the scheme as it currently exists[.]"

In other criticisms, the ESRI, referring to the extension of the help-to-buy scheme, states: "Given the robust demand for housing combined with long-standing supply ... it is likely that these demand-side policies [the help to buy and others] will increase demand for housing, putting pressure on house prices." I will come back in relation to the Parliamentary Budget Office.

Deputy Michael McGrath

I felt in the lead-up to the budget that providing certainty that the help-to-buy scheme would continue beyond 2024 for a further year to the end of 2025 was important for prospective homebuyers and would help stimulate supply, as builders and developers would know for sure the scheme would be there to support prospective house purchasers for the period in question. I believe that was the right policy decision. I also indicated in my budget day speech that, across next year, I will consider whether changes are warranted to the scheme.

On low loan-to-value ratios, it is important to point out that the proportion of claims in the lower loan-to-value bands are much higher for self-builds. Self-builds only account for about a quarter of all claims but for more than 40% of claims in the low loan-to-value bands. That point does not get the acknowledgement it should. It is a significant factor in the data the Deputy and others have relied upon in reaching their conclusion that many people are availing of the scheme who do not need it.

Deputy Catherine Connolly

I am no financial expert but when the Minister quotes Mazars, he does so selectively. The Mazars report recommended phasing the scheme out, stated it was poorly targeted and included other comments I cannot quote in one minute. I would be delighted to tease out this matter further with the Minister.

An Cathaoirleach Gníomhach (Deputy Sean Sherlock)

We will give you some latitude, Deputy Connolly.

Deputy Catherine Connolly

Thank you. The ESRI said the scheme is likely to contribute to higher house prices. The Parliamentary Budget Office stated one third of the recipients did not need help to buy to meet the 10% deposit and that, in 2021, 63% of the claims for the scheme were used to buy properties above the national average house price. I can only talk as an ordinary TD reading the reports and looking at what is happening with houses prices skyrocketing all the time. I ask the Minister specifically for timelines for phasing out the scheme and what plans are in place to design a more targeted scheme and take on a recommendation in the Mazars report to remove self-builds. I do not express an opinion on it. I am asking him, in view of the research to date, what are his plans.

Deputy Michael McGrath

In the format in which we are operating, it is only possible for any of us to quote certain extracts from the report. The report is published and speaks for itself. The Government has considered it.

In relation to phasing out the scheme, the House has just legislated for the extension of the scheme to the end of 2025, so that is the Government’s policy. For much of our history, we have had various schemes to help people buy their first home. I remember well in my parents' time there was a scheme whereby people willing to hand back a local authority home got a grant of €5,000 to help them buy a house. We are spending €5 billion of capital on public housing, cost rental and affordable purchase. It is appropriate we provide assistance to people who want to buy their first home. This is only in respect of new builds. It helps support supply because it assists developers in knowing prospective purchasers will get support from the State to meet the cost of purchasing the home.

Economic Data

Cormac Devlin

Ceist:

83. Deputy Cormac Devlin asked the Minister for Finance his response to recent European Commission forecasts for the Irish economy; and if he will make a statement on the matter. [51398/23]

Pearse Doherty

Ceist:

121. Deputy Pearse Doherty asked the Minister for Finance his assessment of the European Commission’s forecast of a 0.9 percentage point fall in GDP for 2023; the drivers of this revision; and his views on the outlook for the Irish economy and the labour market in the context of this downward revision. [51435/23]

Deputy Pearse Doherty

My question concerns the recent economic forecast from the Commission updating its projections on the Irish economy, in which it predicts a 0.9% fall in GDP this year. Notwithstanding the fact we know GDP has become essentially decoupled from the performance of the domestic economy as an accurate measure, will the Minister outline his assessment of the Commission’s latest projections, particularly in relation to corporation tax revenue and the performance of the Irish labour market?

Deputy Michael McGrath

I propose to take Questions Nos. 83 and 121 together.

In its autumn forecasts released earlier this month, the European Commission projected Irish GDP to decline by 0.9% this year and to grow by 3% next year. This represents a downward revision from forecasts published in May, amid developments in the multinational-dominated sectors and normalising domestic demand.

This negative GDP projection is consistent with weakness seen in the data over the last month, primarily relating to the activities of multinational corporations, including the third quarter flash GDP estimate and goods export figures. Pharmaceutical exports have driven the decline in exports and GDP, owing to a reversal in the so-called Covid dividend that significantly boosted export and GDP growth over the last year or so. This is happening against the backdrop of the Commission’s downward revised projection for GDP growth in the euro area – a key trading partner for Ireland – of just 0.6% for this year.

However, as is widely acknowledged, including by the Deputy, Irish GDP is notoriously volatile and is not useful in measuring the living standards of Irish residents. This is because it includes the globalised activities of large multinational enterprises such as contract manufacturing, essentially manufacturing outsourced to third party manufacturers in third counties. Modified domestic demand, my preferred measure of the domestic economy, is projected by the Commission to grow by approximately 2% this year and next year, broadly in line with my Department’s projections.

The Commission projected headline inflation of 5.3% for this year and 2.7% for next year, with core inflation to ease at a more gradual pace. Again, these projections are broadly in line with my Department’s assessment of the inflation outlook.

More broadly, the Commission’s forecasts suggest that the outlook for Ireland’s trading partners will remain subdued. The Commission also anticipates that global GDP growth will remain below pre-pandemic rates in 2023 and 2024, echoing the IMF’s recent outlook. Finally, the Commission highlights a number of key risks, noting that uncertainty and downside risks to the outlook have increased in recent months. As a small open economy, weak demand among trading partners has potential implications for the Irish economy. My Department will continue to monitor developments and advise accordingly.

In the past few minutes, the CSO will have published the most recent labour force survey data. The survey shows continued strong performance in employment terms so that can give us encouragement. Employment in this quarter is up by some 27,000, bringing us to a new all-time high of employment numbers in Ireland of more than 2.66 million people. The CSO puts the unemployment rate at 4.5%. There is much uncertainty and we are certainly facing clear headwinds in the Irish economy but against that backdrop, the performance of the domestic economy, and of the labour market in particular, remains particularly strong and is noteworthy.

Deputy Pearse Doherty

Those results from the CSO are welcome in relation to some of the other measurements we have seen in recent times, in particular, the Commission's forecasting, which I am addressing in this question. We all know the growth rate in the domestic economy, which was always going to ease from its post-pandemic surge, is expected to slow further as we have capacity constraints that have become a wee bit more binding than people would have expected. We have also seen a 1.8% decline in GDP in the most recent quarter, with the European Commission now projecting a 0.9% fall in GDP for this year. As the Minister stated, the best measurement of the performance of the domestic economy is modified domestic demand. This has increased and is projected to rise by 2.2% this year and next. Despite this, we need to closely consider the forecast of the Commission. We know that the dominant reason for the fall in GDP is the reduction in export growth from the multinational sector. This is somewhat to be expected given the post-pandemic surge, particularly in the multinational and pharma sectors. Will the Minister outline an assessment of the revised GDP forecast and the impact that may have on corporation tax receipts next year and in the time ahead? Are there any needs or concerns within the Department at this stage regarding the forecasts that underpin budget projections for next year?

Deputy Jennifer Murnane O'Connor

I know there have been challenges but I have great faith in the Minister. He has found a good balance and while there have been huge challenges, he is finding the best way forward. My understanding is that the planning and development Bill landed with the committee this week. That is a very welcome move, by the way. I will ask the Minister about capital projects and, as the Minister knows, I would not come here without asking about my town and county. What are the forecasts for the capital plan for the foreseeable future? Are the following projects in the plan: the southern relief road, the injury clinic, the Holy Angels care centre building, the CDNT and the library? I could stay here all day but those are a few I mention offhand. It is important that projects in the capital plans, including the ambulance base, are delivered. Carlow is now a university town and county. The most recent census showed that the population of the county grew by 9%, one of the highest growth rates in the country. I ask that funding keeps coming to us.

Deputy Michael McGrath

I thank both Deputies for their contributions. I will start with Deputy Doherty's questions. We are in a period of lower growth and we are forecasting broadly 2% growth in the domestic economy for next year, which is in line with what the Commission has forecast. When we compare last year's outturn, both in modified domestic demand and GDP which was almost 10%, we will feel the effects of lower growth. It is primarily because of the external environment. Monetary policy is certainly having an impact. Political instability, geopolitical tensions and conflict create an air of uncertainty and instability and make investment decisions more difficult. All of that is having an impact but we are still in a position where we are forecasting growth. I take heart and comfort from the labour force numbers but there are no grounds to be complacent.

On the public finance front, November is a key month in terms of the Exchequer returns. Last year, we collected approximately €13.6 billion in November, including €5 billion in corporation tax. We will learn what the data will be in that respect over the next week or so.

Regarding Deputy Murnane O'Connor, we just had a great example of bringing the macro and translating it into the local and what that means.

Deputy Jennifer Murnane O'Connor

I have been found out.

Deputy Michael McGrath

It is all local. I assure the Deputy that the Government will continue to maintain a high level of public capital investment. It will be more than €13 billion next year. I hope, with the support of the House, we will have the new infrastructure, climate and nature fund which will help to ensure that over the years ahead, come what may economically, we will be able to sustain a high level of public capital investment. I look forward to continuing to work with the Deputy on a number of those very important public projects for Carlow.

Deputy Pearse Doherty

It is important that none of us become complacent. We understand the likely fall-off in GDP and GDP projections is in large part due to the reduction in pharmaceutical exports since the pandemic. Obviously, we had a surge and a bonanza during the pandemic as regards that sector and it played into our receipts. That was obviously going to drop off and return to a more normal level. We have also seen volatility in the tech and ICT sectors. Foreign direct investment will continue to play a vital role in our economy both in terms of employment spillover effects and tax revenue. Sinn Féin is committed to supporting and seeing that investment continue and grow.

What is the Minister's assessment of the labour market in the time ahead given what is happening? He mentioned the reasons we are seeing some contraction and fiscal tightening, such as geopolitical issues, conflict and the level of uncertainty that is now gripping different parts of the world. Where does he see employment being next year? Obviously, the CSO figures are robust and that is to be welcomed. Employment has remained robust throughout, despite the pandemic and recent challenges. Is it the Minister's view that GDP projections are no longer a suitable anchor for assessing the labour market and that we should be looking more at modified domestic demand in that regard?

Deputy Michael McGrath

My assessment is that the labour market will continue to be tight. We will experience some softening over the period ahead but we remain confident in the outlook overall. We stand by the projections we made on the fiscal side and the macroeconomic side in the budget just a few short weeks ago. The next opportunity to update those projections will be in the stability programme update which will be published next April.

I will not deny that the external environment has deteriorated. As a small, open economy, that has a direct impact on Ireland. Many of our main trading partners will not experience any growth this year or perhaps next year, and that has knock-on consequences for us.

Regarding corporation tax receipts, we had a weakness for the past three months relative to the same months last year. That trend may not necessarily continue in the current month, November. That remains to be seen and we will find out in the coming week or so as the information comes through. However, we stand by the forecasts and we will update them in the coming months as part of the stability programme update. The external environment is one that is characterised by uncertainty and instability. That does have an impact and it makes it all the more important that we manage the domestic levers as well as possible, remain competitive and keep an eye on our cost base.

There are absolutely no grounds for complacency in terms of the strength of the labour market. It is not necessarily a predictor of future activity, so we need to continue to invest in that regard. There are capacity constraints. We have discussed the labour market on many occasions. We have also discussed the housing market, which is also a constraint, as I have acknowledged. We have to continue with the reform programme, including, for example, in the planning system. We need continued investment in renewable energy, ensuring energy security, and in education, skills and research.

All of these, as well as our income tax system, are competitive factors when it comes to Ireland's relative position on international investment decisions. We heard a reminder of this again today from the American Chamber of Commerce survey of multinational enterprises in Ireland. It is quite positive despite the challenging backdrop. It highlighted all of these issues as ones the Government needs to focus on.