I thank the Chairman for inviting me to appear before the select committee and giving me an opportunity to discuss the task that has been assigned to the committee. The task of redesigning the routes and mechanisms through which the Oireachtas can provide for greater scrutiny of the budget has the potential to yield considerable benefits. As greater parliamentary scrutiny presents an opportunity for more evidence to be demanded in support of policy proposals, this, in turn, should lead to better policy outcomes. For this reason, I am happy to contribute to the committee's deliberations.
I am here in my capacity as director of the Economic and Social Research Institute, ESRI. Therefore, most of my remarks will relate to the ESRI's current role in the budgetary process and its possible roles in assisting the Oireachtas in the future. However, I have a direct personal interest in the ongoing process of redesigning the budgetary process, as I was one of the original members of the Irish Fiscal Advisory Council, on which I served from 2011 to 2015. I also chaired the first national economic dialogue in 2015 and will act as chairperson again next week when the second such event is convened. When I take questions from members of the committee after my opening statement, I will be happy to reflect on the possible lessons which can be taken from my experience in the Irish Fiscal Advisory Council and the national economic dialogue.
I would like to speak about the specific role of the ESRI in the budgetary process. According to its mission statement, its goal is "to produce economic and social research that informs public policymaking and civil society". In this way, a large proportion of its research has a broad relevance for budgetary scrutiny. For now, I will focus on the direct inputs which arise from two models that were developed by the institute and are maintained by us. I refer to the macroeconomic model which was formerly known as HERMES and is now known as COSMO and the tax-benefit model which is known as SWITCH. The SWITCH model which is used to assess the distributional impact of tax and social welfare changes is based on a large-scale representative sample of Irish households and allows us to calculate gains and losses across income distribution. It is critical that the model is based on a large-scale sample. In the absence of a tax-benefit model, analysts need to look at examples of households. However, it is impossible to know if the examples chosen capture large or small proportions of the population.
The SWITCH model is used by the Department of Social Protection and the Department of Finance, typically in collaboration with the ESRI, to simulate the distributional impact of tax and welfare changes. The ESRI tends to publish a distributional analysis of the budget in the days following the Budget Statement. The model has also been used in numerous research papers. The most recent example is a paper published last week which compared financial incentives to work in Ireland and the United Kingdom. I should note that the SWITCH model has the potential to be used in proofing the budget along a number of dimensions. I refer, for example, to poverty proofing, gender proofing and disability proofing. As the model is based on a large-scale representative sample, it is possible to draw conclusions that cannot be drawn from an analysis of example households.
I now propose to discuss our model of the macro-economy. We are in the process of retiring one model which was known as HERMES and introducing a new one which is known as COSMO. These macro-models have typically been used by the Department of Finance to conduct sensitivity analyses of budgets' central forecasts. Such analyses are published as part of the budget documentation. In budget 2016, for example, the ESRI simulated how the headline economic figures would change if global GDP growth turned out to be 1% lower than forecast or if the household savings rate turned out to be 1% higher than forecast. The Department of Finance also draws on the ESRI’s macro-model to simulate the effect of policy changes where the effect is large enough to be captured at the macro-level. For example, this year’s spring economic statement included a simulation of the effect of income tax reductions on employment. The macro-model has also been used in studies which seek to estimate the types of taxes which have the most detrimental impact on economic activity as measured by variables such as employment and GDP.
While the HERMES, COSMO and SWITCH models provide the platforms for the ESRI’s most direct inputs into the budgetary process, many other strands of our work are relevant. Some of this work is undertaken as part of joint research programmes with Departments. I will use two examples to illustrate this. Since 2015 the ESRI has operated a joint research programme with the Department of Finance. Under this programme, we have conducted work on the relationship between corporation tax rates and foreign direct investment. The findings were published last week. The relevance to policy debates on taxation should be clear. We are about to begin a project on wealth taxes, using newly available data for wealth which were collected by the CSO on behalf of the Central Bank. I should note that one of the objectives behind this research programme is the generation of greater analytical capacity in the economics of taxation in the ESRI and the Department of Finance.
We also have a joint research programme with the Department of Health. The best known output from this programme was the report on universal health insurance published last year. Under this research programme, we are working to develop a projection model for health expenditure. It is hoped this will allow the Department to assess more accurately the impact of issues such as population ageing and unmet need. The ESRI is also undertaking work on GP usage which will be important in estimating the likely cost of extending free GP care.
The institute is actively engaged in research across a wide range of other areas which are relevant but I will mention just one more for now. For a long time, we have conducted evaluations of training and employment programmes and we continue to do this. The most recent example was an evaluation of the back-to-education allowance and the results were striking, with little evidence of improved employment prospects for participants. The policy conclusion was not that the programme should be ended. Instead, the evaluation prompted questions about how the programme might be improved to meet its targets.
I mentioned at the outset that, from my perspective, one potential benefit from greater Oireachtas scrutiny of the budgetary process will be a greater demand for evidence in support of policy proposals. Putting this another way, I see Oireachtas scrutiny as being another dimension in the move towards more evidence-based policy-making. For this approach to yield benefits, it is important that the evidence used is generated through rigorous analysis. In that context, the ESRI is eager to ensure that the research that we are conducting is readily available to the Oireachtas and communicated directly to members. Our funding model makes it difficult for us to undertake substantial pieces of work unless the work is funded. However, we are eager to co-operate with members and the proposed budget office as part of a general national effort to increase analytical capacity in our public administration with the overall goal of achieving better outcomes for our citizens.
I am happy to take questions.