Engagement with Irish Fiscal Advisory Council

I welcome the representatives of the Irish Fiscal Advisory Council. I draw their attention to the fact that they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable. I invite Professor John McHale to make his opening statement.

Professor John McHale

On behalf of the Irish Fiscal Advisory Council, I thank the committee for giving us the opportunity to share our views on the proposed changes to the budgetary process. As noted in our most recent fiscal assessment report published on 8 June, the council welcomes the proposals to reform the budgetary process to allow for greater Oireachtas scrutiny. With me are council members Mr. Seamus Coffey and Mr. Michael Tutty, as well as the council secretariat. Our chief economist is, however, in Lille.

We are all there in spirit.

Professor John McHale

He is attending a conference.

(Interruptions).

Professor John McHale

Starting with its role in the new budgetary process, the council favours retaining the two appearances its representatives currently make before the Oireachtas. It could also provide a valuable input at two other stages in the budgetary cycle. Up until now, its representatives have appeared before the Joint Committee on Finance, Public Expenditure and Reform twice a year, in December and June after publication of the council’s fiscal assessment reports in which the autumn budget and spring SPU, stability programme update, are assessed. A third appearance by them following publication of the council's pre-budget statement in mid-September could also be useful. The statement sets out the macroeconomic and fiscal context for the forthcoming budget and discusses the council’s view of the appropriate fiscal stance.

Although the council favours publication of the summer economic statement at the same time as the SPU in April, the role of its pre-budget statement would be enhanced in the new system if the timing of the summer economic statement was similar to this year. Given the greater Oireachtas focus on the national economic dialogue, this is a fourth stage in the new budgetary process where the council would welcome the opportunity to provide an input. It could play an important briefing role at the dialogue by providing the macroeconomic and fiscal context for discussion at this event.

Our written submission deals with two other issues. The council would like to emphasise the importance of informative medium-term fiscal forecasts to underpin the proposed new budgetary process.

We need the data and forecasts, including those of the Department of Finance, to be published before we can carry out the assessments. That is why our two key reports thus far came out after the SPU. When the information is available, we need time to analyse it, but we bring out our analysis as quickly as we can. It comes out in early June. Following the budget, we carry out a series of statutory assessments and the report comes out in late November or early December.

The third appearance we suggested following our pre-budget statement has somewhat more of an ex ante flavour to it in terms of our recommendations, particularly on the fiscal stance. However, it could also be more constructive because it would follow on from the summer economic statement and the mid-term expenditure report. We can have most value when we are actually commenting on specific publications or documents, but we certainly would be open to having the engagement earlier. In recent years we have produced our pre-budget statement in September. It would make sense to have it earlier, potentially in August, but still following the mid-term expenditure report and the summer economic statement. Beyond this, we would be open to suggestions on how we could be of even further help to the committee. If other appearances would be useful even earlier in the process, while recognising our key function is carrying out the various statutory assessments, we would certainly be open to making them. Our goal is to be as supportive as we possibly can. We would be very happy to discuss suggestions members might have on when the committee would like to receive input from the council.

Professor McHale states most analysis is ex post analysis. Let me outline my understanding from our discussions with the Department of Finance and others involved in the process. There was a question about whether the Oireachtas committee could be involved in the stability programme update in advance of being published and considering the question of when it could take place. There are tight timelines. Data are required in March for the first quarter returns. My understanding of the process is the Irish Fiscal Advisory Council was directly involved with the Department of Finance in the process of shaping in advance of the stability programme update being written. In that case, the council’s work is ex ante with the Department. My question is whether we can include the Oireachtas in the ex ante assessment of what the stability programme update might be, even if there is a tight timeline.

Professor John McHale

One of our functions is to endorse the macro-economic forecast, not the budgetary forecast, on which the stability programme and budget are based. We do see the Department's forecasts in advance of their being published and we then undergo a very rigorous endorsement exercise. We produce our own benchmark forecasts as part of that process, which we use for comparison purposes with the official forecasts. However, the Department has made important points on the need for reasonably up-to-date data in order to produce its forecasts. It is only in March that the national accounts for the previous year are available. To try to produce forecasts in advance of having the data would lead to lower quality forecasts. Even when we receive the forecasts, the timelines are very tight because they are produced only after the data become available. In terms of forecast provision, it would be difficult to bring it forward.

The main issue is not so much the timing of the SPU but the content. If I were in the members' position, it would be a matter of trying to get as much detail as possible on the actual policy plans contained in the SPU and associated spring or summer statement, depending on the timing.

As explained in its reports, the projections made in the SPU have recently contained limited detail on the Government’s envisaged policies and do not fully incorporate the costs of maintaining existing public service levels and real benefits. Yesterday’s summer economic statement goes some distance towards incorporating envisaged Government policies in official forecasts by showing the path for revenue and expenditure in a scenario where the available net physical space is used. However, it is still not clear how this is to be reconciled with the estimated costs of simply standing still in the provision of public services and maintaining the purchasing power of social protection benefits. In the absence of informative medium-term forecasts for revenue, expenditure, the deficit and the debt, the capacity to have a meaningful Oireachtas input in advance of the budget and SPU would be severely limited as policy debate would be based on unrealistic technical projections for the public finances. The reform of the budgetary process should be accompanied by a move to provide more informative medium-term forecasts on a stand-still basis, as well as by a forecast that includes the impact of the Government’s envisaged tax and spending policies. Such plans are needed for effective management of the public finances, as well as being a requirement of the EU budgetary frameworks directive.

While the proposed parliamentary budget office, PBO, could play a valuable role in the budgetary process, its precise design and functions need to be carefully considered to ensure its effectiveness. The committee could consider a PBO, the role of which would lie somewhere between the current proposal for a PBO with limited functions and one with a more extensive remit. A PBO that is well resourced but with a degree of discretion and strong independence seems to be a better model compared to the one proposed.

Summing up, the council believes it could play a valuable supporting role for the Oireachtas in augmenting the two current appearances by its representatives before the Oireachtas with a third in September following publication of its pre-budget statement. In addition, it could contribute to the new budgetary process by providing a briefing for the national economic dialogue. To allow meaningful Oireachtas participation, the proposed changes to the budgetary process need to be underpinned by the provision of informative medium-term budgetary forecasts.

The council is grateful for the opportunity to share with the committee its views on the proposed new budgetary process and welcomes members’ questions and feedback.

On the issue of timing, the possibility of having a third meeting would make a lot of sense. My general understanding of the OECD review of the budgetary scrutiny process is that there is a need for more timely intervention by the Oireachtas in advance of decisions being made as part of the process. As we heard in an earlier presentation, such open scrutiny would improve the public policy approach to budgeting. Is it not possible in order to inform the process, rather than having a meeting in December after the budget is published and a meeting during the summer after publication of the summer economic statement, to have dialogue between the committee and the fiscal advisory council in the interim period, possibly in April before publication of the stability update or in June in advance of publication of the summer statement or the national economic dialogue? A meeting held in advance might improve the quality of that dialogue. Similarly, the idea of having a meeting in September in advance of the more final budget negotiations makes sense. If we are to have a third meeting which would be good, could we switch the date to make it part of a live process?

I was interested in what Professor McHale had to say about the need for better forecasting in the medium term. I do not know whether he heard Professor Barrett from the ESRI. What is the difference between forecasting and modelling? Is the model the tool to deliver forecasts? Is Professor McHale saying we need to use that model as part of this process to deliver forecasts? Is there another mechanism for delivering the forecasts he is considering?

Professor John McHale

I thank the Deputy for his questions.

On the timing, I must draw attention to the mandate of the council. Its function essentially is to provide a number of assessments and endorsements. Thus, it has a certain ex post focus. We assess the budgetary forecasts. We also assess and endorse the macroeconomic forecasts. We assess the Government’s fiscal stance on the basis of whether it is conducive to prudent economic and budgetary management. We also assess compliance with fiscal rules.

It should be noted that we have been quite critical in recent reports of the lack of information on medium-term plans in the stability programme update, SPU, and last year of the content of the spring statement. There has been considerable progress in the summer statement. One of the problems in the past was that the medium-term forecasts, that is, the budgetary forecasts, were developed based on the scenario of no policy change. Even though last year it was indicated that the intention was to use the available fiscal space, the medium-term forecasts put forward were based on none of that fiscal space actually being used, which led to very uninformative medium-term forecasts. There has been a substantial advance in the summer statement which includes medium-term forecasts that are based on the Government's plans in terms of the use of the fiscal space. However, I think more detail could be provided and, from the point of view of the scrutiny role of this committee, the more information that the committee has on Government plans the better it will be able to do the job of scrutiny. The committee must avoid a situation where it is being asked for suggestions that may or may not be taken into account. However, the more it knows what the Government is planning to do and the more that information is built into the forecasts, the more effective that scrutiny role can be.

We have to try to avoid a situation that might have obtained in the past whereby committees were swamped with information. It is not just about the volume of information, it is also about the quality of that information and whether we obtain the information we really want. There may have been a perception in the past that certain Departments, in an attempt not to see any action by a committee, might provide large amounts of information to ensure that nothing would happen.

Professor John McHale

That is a very valid point. It is a balancing act and I recognise that there are certain limits to the level of detail that can be provided. In its draft document, the committee notes that there is certain detail on tax measures that one would not want to announce in advance because it could lead to a behavioural response. All of those things would have to be taken into account. There is a happy medium where the committee is given a broad outline - but still more detail than was present in the summer statement - with adequate costings around that. That would allow for a more constructive debate to take place post-SPU.

Before I call Deputy Burton, Professor McHale's two colleagues should feel free to comment.

Mr. Seamus Coffey

I will speak briefly on a point Deputy Eamon Ryan made about modelling and forecasting. One does not need a model to forecast. One can put one's finger in the air and come up with a number. As Professor Alan Barrett suggested earlier, if one has a number, one must be able to justify it. One of the justifications for it is that one has some solid background to it. When it comes to trying to make forecasts for the economy, one would look at past patterns and relations between different variables and see what one might get from that. The model produces a number but one will have to sit down and question whether it makes sense. There is some subjective basis to it but one is moving from a situation where one at least has a sound theoretical base from which one can question what is happening in the economy and one can then make a judgment call either up or down One needs a starting base to begin with. In recent years, modelling on the Irish economy has improved but it is still not, and never will be, perfect. There should be a complementarity between modelling and forecasting. A model should feed into it. However, there is some subjective element to it.

Mr. Michael Tutty

I will comment on Deputy Ryan's point on the SPU. In case it was not quite clear, the only part of the SPU that we see in advance is the medium-term forecasts. We do not see the rest. We only see the medium-term forecasts a week or two before the actual publication. We are not way ahead of the rest of the world in terms of knowing what is in the SPU.

In terms of having too much information, what we are saying in respect of the medium term is that we should have what is there at present, namely, the no-policy-change approach, a standstill position showing everything, including indexation, and what the Government intends to do in terms of the overall aggregates. Those three simple pieces of information give one a lot of meat to get into. What we are suggesting would not swamp the committee at all.

I welcome the witnesses. Mr. Tutty's final comment was very helpful. Yesterday, we had a reasonable example of what happens, the Department of Finance telephoned about an hour before the release of the document. We were invited to the Department of Finance. Those of us who read the newspapers or engage in social media had the privilege of reading a summary and commentary on it. I do not know how constrained the officials are in the Department, I know they are present, but other than getting the actual document on which there was an embargo of one hour into our hands, I did not see any particular usefulness to the exercise.

As I understand it, but I may be incorrect, the budgetary oversight committee is to have a role in the scrutiny, and is to be in a position to do some analysis in a summary way, of the information flows on a timely basis. It would be very useful if we had details of the Irish budget, similar to the way on a previous occasion the German Bundestag had details of the Irish budget, which shocked people in this country, but was entirely routine in Germany. How do we arrive at a position where as the committee develops, we are provided with the documentation and information that we can then analyse on the basis that we have been discussing? That would be very helpful.

I think it applies as much to capital expenditure as to current expenditure. Having come out of a very difficult period and moving into recovery and an expansionary period, how do we get quality information on how the capital spend is going? The Irish Fiscal Advisory Council does the medium-term forecast. We need information flows as that is very important in how the economy grows.

Professor John McHale

I do not have very much to say on that. Returning to my previous response to Deputy Eamon Ryan, the great advantage of this new process is that we are getting away from the big bang budget approach where we did not know anything until the Budget Statement was made. I think the whole period should be looked at. Getting documents in advance of publication is less important, particularly if there is a very short time advantage as Deputy Burton described in the case of the summer economic statement; what really matters is the content of the documents themselves given that one has a period of time to apply scrutiny. There are two issues, timing and content. I would think that ultimately it is the content that matters, even if one does not have a particular advantage in terms of early access to the documents.

In the context of the standard publications from the Departments, would additional information be useful? For example, would it be useful to have a percentage analysis of changes which do not tend to be in the published documents but which the Department probably does automatically on their programmes? The members of the committee should not have to sit down and re-analyse or have somebody in the budgetary office re-analyse what is probably in a programme in the Department anyway.

Professor John McHale

Certainly if that would be useful to members of the committee to get the data in the form that is most user friendly, that definitely could be looked at.

On the whole, the documents are put together in a reasonably user-friendly manner in terms of access to the information. It may be the case, however, that certain underlying background data are not included in the final document, partly because the Departments want to make it accessible and do not want to swamp the public with data. It may be very important, however, in terms of the committee's role in scrutiny that data are provided in an accessible manner.

Does Professor McHale wish to comment on the information available on the capital programme?

Professor John McHale

This again goes back to the broader question. Mr. Tutty laid out very well what one would ideally like to see in terms of a medium-term plan. One of the things we have been pushing strongly for is that the forecasts be provided based on an estimate of the cost of what the Irish Fiscal Advisory Council refers to as standing still while continuing to provide the existing level of public services and maintaining the purchasing power of benefits. Beyond that, the more detail that can be provided in terms of the different aggregates the better. From our point of view in terms of accessing forecasts, we do not need so much disaggregated detail to assess the forecasts. However, in terms of the committee's particular role in assessing the plans and perhaps making alternative budget neutral suggestions for the plans, it seems the more detail the committee can get, including on the capital side, the better.

I welcome representatives of the Irish Fiscal Advisory Council back again. Meeting them is one of my favourite engagements of the year. I very much welcome the council's proposals for its involvement in the new budgetary process and agree with everything it has suggested. The Irish Fiscal Advisory Council is leaving open the possibility of having two additional engagements. It proposes a pre-budget engagement with the committee in September when it has had a chance to consider the summer economic statement.

Professor John McHale

The meeting could be held earlier than that if it was helpful.

It also proposes to engage with the committee at the time of the national economic dialogue to give its take, as it were, on questions of fiscal space and compatibility with fiscal rules.

Professor John McHale

We could have a useful role in that we provided a briefing at the national economic dialogue last year. We have not been asked to do so again this year and perhaps there is an argument that it is not necessary every year. However, given the amount of work we do on the fiscal rules and fiscal space, we could usefully provide a briefing at the dialogue to all participants, including members of the committee.

I do not have many questions because I agree with the Irish Fiscal Advisory Council's proposals, which would be very helpful. The council suggests the model for the parliamentary budget office, PBO, should be somewhere between the current proposal and a model in which it plays an extensive role. Will Professor McHale elaborate a little on that suggestion?

Professor John McHale

One can think of a spectrum of models for the parliamentary budget office. It seems to us, and this was also evident in the OECD report, that what is being proposed is at the less ambitious end of the spectrum. In particular, under the current proposal, the office would not have direct responsibility for or capacity to do its own costings, even though it would have an important role in the validation of costings coming from Government. Clearly, it would have very important roles in terms of analysis and validation. On the other hand, in the election campaign it seemed that some very ambitious models of the office were proposed. Under these, the office would have almost unlimited demands placed on it in terms of costings from various bodies.

One thing that is clear from international comparisons of different types of independent fiscal institutions is that costing work is extremely resource intensive. The Irish Fiscal Advisory Council can run on a relatively lean model because the nature of its mandate is such that the various assessments do not require many people to do them. However, providing costings and analysis of specific policies and proposals is an extremely resource-intensive activity. Much of this detailed specific analysis is done by the ESRI. Professor Barrett discussed this earlier. The ESRI is a substantially larger body than the proposed model for the PBO.

We believe there is potentially a middle ground that would show more ambition than the current model. It is important that the new body have real capacity to do costings, even if, for the most part, it outsources much of that costing responsibility to the Government, which does a significant amount of it already. To be able to validate costings, it is necessary to have the capacity to do it oneself and also to do the cost-benefit analysis and micro-simulations of policies. It is important also that the body have a degree of discretion. The Congressional Budget Office in the United States is required to cost all legislation. It also receives a large number of information requests to cost various proposals and has a degree of discretion in this regard. Depending on its resources and recognising the level of resources required to perform this function well, it does not have to accept all requests. It could be worth considering some sort of middle ground.

Is the Irish Fiscal Advisory Council proposing that it have a role in assessing these costings? Would it provide analysis, particularly of alternative budget proposals, in its engagement with us in September?

Professor John McHale

The mandate of the Irish Fiscal Advisory Council does not extend to getting into specific policy proposals. It is specific in terms of the overall budgetary forecasts, in other words, the macro-forecasts to which I referred earlier. Unless the mandate of the council is changed, it would not be appropriate for us to get involved in that area.

In terms of the information available to us in the context of these debates, is there a major gap in terms of whether the information provided on corporation tax is detailed and up to date? I do not know if I have ever pointed out to Professor McHale that when Deputies ask questions about corporate tax, the most recent figures supplied to us are from 2011. This is extraordinary when one considers, for example, that €2 billion in corporate tax suddenly appeared last October and nobody knows the reason this happened or whether it will happen again. These are large numbers which could have a significant impact on the revenues available to the State. When Deputies seek to get to the bottom of the issue and ask questions about whether this revenue will continue to be generated, the reason for it and how it fits into the pattern of corporate tax receipts over time, the information is either not available to us or we are provided with information from 2011. Does something need to be done to ensure Deputies have access to up-to-date information?

Professor John McHale

Mr. Coffey, our expert on corporation tax, will answer the Deputy's questions.

Mr. Seamus Coffey

Timing is an issue and I agree with the Deputy that we do not have a large amount of information. However, one of the issues is that the relevant information is not available. We receive the monthly Exchequer returns which means it is known within two days that money is being collected. The issue then is how this came about and how quickly Revenue can compile the data. Companies do not submit their final tax return until nine months after their year end. They pay their tax in advance and make an estimate of how much tax is due before their year end. They do not submit their final return to Revenue until nine months after year end. This means that companies which had their year end at the end of December last year will not submit their tax return until September. These returns then have to be processed and all the information must be put together, which can take another nine, 12 or 15 months. There is, therefore, a lag of two and a half years, extending from the end of the year when the Exchequer shows the money being received to the point at which Revenue is able to publish details on how it was collected.

Revenue published a letter last year that gave broad indications of where the money was coming from. The simple reason companies are paying more corporation tax is that they are making more profits. While we might not have great detail on it Revenue provided a breakdown by sector, in rough terms, of where the money came from and the type and size of companies that were paying the money. One can go through the tables and see the gross profits, deductions allowed and how much tax was taken. The starting point was much higher. One issue is timing. The information takes time to come in and be collated. While it would be great if it came out quicker, it is not possible.

Would it be possible to have provisional figures based on the tax paid, even if qualified by the fact that they could change when the final figures are processed?

Mr. Seamus Coffey

Revenue does not have the inputs. When companies submit their preliminary tax, they tell the Revenue how much tax they think they owe and they pay 90% of it. They do not provide great detail. Companies must file a very detailed corporate tax return nine months after their year end. We could not get any additional information much quicker, unfortunately.

While it is not Mr. Coffey's fault, it is extremely unsatisfactory that we cannot show the pattern over time in the different tax categories, up to as recently as possible, and what it represents as a proportion of overall tax revenue. It would be very helpful for us to understand the pattern over time, not just what we are proposing in any given year in terms of adjusting tax and expenditure, but to see how it fits into an overall pattern. Is the information available in a digestible form and should it be included in such statements, which it is not?

Professor John McHale

The monthly Exchequer returns have much detailed data in which one can see the trends and how various tax heads are performing relative to profile. Although one has to do some digging to get it, the information is there. Regarding the SPU or summer statement, there is a trade-off between having documents that are too big - sometimes IFAC is accused of putting too much information into its documents-----

Professor John McHale

We do an intensive interrogation of the budgetary and macroeconomic forecasts related to all elements of the mandate. If the Deputy would like to see the data in particular ways in our reports, we would be very happy to talk to him and see how we can accommodate it in our reports. I am sure the Departments of Finance and Public Expenditure and Reform would do the same. We want to be as helpful as we can.

I hope that suggestion can be taken on board. While I take the point about digging, the time to dig and collate is limited, as it probably is for the witnesses too. To have this kind of information available in easily digestible tables would be extremely helpful for us.

I welcome the witnesses. The committee was established to examine arrangements for budgetary scrutiny. Rather than having everybody getting in each other's way and having so many bodies examining different things, we must work out a structure in which there is a real input at particular times with the committee when it is established. IFAC's role is to independently assess and publicly comment on whether the Government is meeting its stated budgetary targets.

I would like to hear from IFAC about where it fits into the structure. If not today, could witnesses think about it and make a submission on where they see IFAC's role? We will have a parliamentary budget office and inputs from the ESRI, IFAC, the Department and so on. I am afraid we will all be chasing each other. At what point should people come into play? Perhaps, the witnesses could, in due course, give it some thought. When the committee is properly established and is doing its job and working with the parliamentary budget office, where does IFAC fit into it, regarding having a real input at a particular time? IFAC is charged with a particular responsibility in its establishment. Would it have its input at a particular time of the year, for example?

Mr. Michael Tutty

I thought we were doing it in our presentation today. We see ourselves interacting with the committee, twice a year now, and potentially three or four times per year. As Professor McHale outlined at the beginning, our role comes after certain events rather than before them. We are more limited in what we can do for the committee before the stability programme update, SPU, comes out or immediately before the budget. The one area where we could, perhaps, get more involved is our pre-budget statement, if it can be brought forward to an earlier time than mid-September, which is when it comes out and which is late in terms of the committee's deliberations on what should be in the budget.

We need inputs from the Department and the Government for our work. We need to know what their projections and plans are and we can then assess them in terms of how they fit with the fiscal rules and what flexibility is there. The Departments of Finance and Public Expenditure and Reform should supply the committee with the basic information for its deliberations. We should also receive this input for our deliberations, and we can then help the committee to comment on or interpret them.

This is where the parliamentary budget office comes in. In some of the proposals at the time of the election there was a suggestion that IFAC might become the parliamentary budget office. We did not see it as being a suitable role for us and the Parliament has gone down a different road in terms of establishing a separate parliamentary budget office. The committee should look to the parliamentary budget office to see how it can help the committee better. The parliamentary budget office will be on site here, dedicated to looking after the interests of all the Deputies and Senators. Our input will come at specific times. We cannot play the role of holding the members' hands throughout the year and helping them with every step along the way. The parliamentary budget office should be developed to play this role.

The submission was very good and very focused on the work we have to do. There have been many submissions about IFAC taking on the role of costings, which I was never 100% convinced of.

I think it could interfere with the independence of the office. One is then dealing with political parties and elections which could take away from it.

Three options have been spelled out. Will Professor McHale explain how he sees option 3, the hybrid option, working in terms of it not being a clearing house but being able to do independent costings of budget proposals? When one speaks of independent costings of budget proposals, is that independent of the Departments of Finance and Public Expenditure and Reform or is it approved by the parliamentary budget office? Is it the case that the office would have access to the information, as suggested, and data from all Departments, including the Revenue but they could decide that is under-providing and have autonomy in that regard.

Professor John McHale

In terms of independence, the parliamentary budget office is a body that would not take instructions from Government. It would not take instructions from Parliament either. It would be an independent body and would have a very clear remit and set of responsibilities, for instance like the Congressional Budget Office in the United States which very much protects its independence. That would be critical. In the hybrid model the idea is that it would have the capacity necessary to do the kind of analysis that would be asked of it by the Oireachtas, that is analysis of policies, including cost benefit analysis but also the ability to do costings, including various costing tools, such as expertise in micro simulation. The point I was making is that it requires resources, that it cannot be done on a shoestring, if one is to do it properly. At the same time, one cannot expect it to meet every demand that is placed on it for a costing, particularly when one is costing specific measure or doing a cost benefit analysis of specific measures. Sometimes that can be extremely complicated as Professor Alan Barrett discussed earlier. It is as the Deputy describe some sort of hybrid model that would retain the advantages of having a strong capable office, but not move so far in terms of the demands placed on it that it becomes unworkable.

Should the office have the ability to have independent costings of the relevant Department, so if it was a taxation issue, that it could be independent of the Department of Finance's costings?

Professor John McHale

I think it should have the capacity to do its own costings and that does require resources. Also one does not want to have too much duplication so that a lot of costing goes on within Departments and one would want to build on that. In many cases it may be that one is validating the costings of Government. The Deputy will be talking to the head of the Office for Budget Responsibility in the United Kingdom who does a lot of this work, but the Deputy should not underestimate the level of expertise and the resources required to do this well. I worry as I look at the model that it looks like it will be resourced at quite a low level even when it reaches steady state. I suppose the message, as we look at the international experience, is to recognise how resource intensive costing and associated budgetary analysis is.

That is quite interesting and it clarifies my own views on this matter as well. The Department will have a very strong view that there will be no second set of costings. The Department of Finance costings are the costings. The Department of Public Expenditure costings are the costings and the question is then what does one do, as Professor McHale mentioned - is it just a clearing house, where one filters these costs through or is there a validation?

One of the issues I have been trying to get to the bottom of is the cost of abolishing the USC. This has been debated for the past two years. We have costs provided to us by the Department of Finance on a number of occasions that it would cost €3.7 billion because that is the amount it would cost to abolish the USC this year.

However, the Department of Finance tells us a phased abolition of the USC cannot by costed, even when we give it the figures by how much we want to reduce it year by year. The Department can tell us how much it will bring in each year, up to €5.4 billion by 2021, but it cannot tell us the cost of abolishing the USC on a phased basis.

Using that as an example, does Professor McHale believe that when the Department of Finance says it knows the USC will bring in X amount each year up to 2021 and knows if it abolishes it in 2017, it would cost X amount but phasing it out in the way described, the independent costing units would have the ability to come in and say that can be costed or assumptions can be made that can provide costings, because every costing is based on a certain assumptions?

Professor John McHale

The Deputy has more or less answered the question himself, in the sense that the more capacity that one has, the more knowledge of costings that one has, the better position one will be in to push back so that if one gets an answer that this cannot be costed or one may have questions on the way it has been costed, if one has that capacity, one will be in a better position to interrogate what is coming back in terms of those costings. This could be with a model where, for the most part, it is a validation exercise where the more detailed work is being done at departmental level but to play that validation exercise and where necessary go beyond it, one needs a certain level of capacity and that requires resources.

I think Professor McHale mentioned he was open to providing data that underpins his report to the committee. I am not sure if I ever sent a letter looking for that data. I do not think I got it anyway.

Professor John McHale

We now have the spreadsheets underlying all the tables published in the online version of the report, so it was making that data available. If one wants to do different things with the data and interrogate them in different ways, we want to make them available to everybody. We have done that, partly at the Deputy's suggestion. If we misunderstood exactly what he was looking for, we can-----

Professor McHale knows more than most that data can be abused. The Office for Budget Responsibility in London has come out and said in regard to the election campaign that there was a massive abuse of data by some of the campaigners. That is why it is important to have as much data as possible but I take the point that a data dump will frustrate the committee. I am not sure how many parliamentarians read the reports of the Irish Fiscal Advisory Council.

Professor John McHale

Not enough.

That is the problem. We heard from the ESRI earlier of the number of reports from it which are not being read by all parliamentarians. I am not reading all their reports. We need to be careful in terms of the amount of data we have and the presentation of data. I agree 100% with Professor McHale in regard to the standstill position that should be presented. It gives a false reading by the Department when it does not include that data.

I was at the engagement with the Department of Finance yesterday and I put the following point to it, namely, the argy-bargy between IFAC and the Department of Finance in regard to the fiscal space, because it is deeply frustrating for me as finance spokesperson. That is my language but Professor McHale will suggest there is no argy-bargy and that everybody agrees. When I put it to the Department that we should include inflationary cost for non-pay items, it said that should not happen and that it is the responsibility of Government to manage budgets and, therefore, within a budget envelope, inflationary costs should be dealt with within that envelope. The reality is that when one is dealing with a health budget where so much of the budget is for pay, there will be health inflation. Will Professor McHale comment on that given the fact he said there should be three sets of data presented, the no-policy change, the assumptions based on the policy intentions of the Government and the standstill position. Given the Department of Finance's view that it should not happen, what is his view on that?

In Professor McHale's interview on " Morning Ireland" where the committee and the public learned what was in his report, he was pulling his punches but we will have a chance at the finance committee to scrutinise that a bit more.

Regarding the data on the size of the fiscal space in the context of a stand still position, the position of the Irish Fiscal Advisory Council, IFAC, continues to be that it is in the region of €3 billion to €4 billion and not the €8 billion that the Government claims. However, the data that underpin those assumptions have never been released, to my knowledge. If we are to have an informative debate and discussion based on quality information, we must have the engagement that Professor McHale is suggesting with IFAC on a more regular basis during those set pieces and the data that underpin the assumptions of the council must be provided to us. The IFAC is giving its projections for this year, to which I subscribe, but the Department of Finance is saying something completely different. There are figures floating about but nobody is getting to the bottom of it at the end of the day. One body is saying X because it is assuming Y, while another is saying A because it assuming B. The data that underpin all of that must be made available. The council's reports continually suggest that we are not providing adequately for demographic changes but to my knowledge, and Professor McHale can correct me if I am wrong, we have no data to show what provision we should be making for demographic issues.

I will leave it at that. While I am being critical now, I believe that the IFAC has a huge role to play in terms of the rules and the budget. Outside of the set pieces, members of the committee should, if possible, be able to draw on the expertise of the IFAC on an ongoing basis, albeit within certain limitations. We received a briefing document from Department of Finance officials yesterday on the summer economic statement. On examining it in detail, I noted that €3 billion of the fiscal space was being allocated to the contingency fund every year which should, over three years, amount to a €6 billion fund but Table 3 in the statement shows that there will only be €3 billion in the fund. How does that work? These are questions we need to be able to ask the IFAC because the debate is going on but we do not have accurate information. We had statements on it yesterday but we have no expertise to draw on in terms of how the figures are being presented, used or abused.

Professor John McHale

The Deputy has raised a variety of issues which gives me a useful opportunity to clarify some points. First, the council absolutely accepts that legislation related to something like increasing social protection benefits is drafted at the time of the budget. However, one must distinguish between the point at which the policy decision is made and the process of forecasting. One must, as part of the planning process, have good forecasts for what will happen over the next number of years. If one has a set of forecasts based on the assumption that there will be no change in benefits at all or no wage increases post the Lansdowne road agreement, then such forecasts will have very little value. Therefore, the idea is that one develops certain conventions, recognising that these are not policy commitments but outlining what it would cost to keep benefits constant in purchasing power terms. In other words, one outlines what it would cost to ensure that spending keeps up with demographics so that one maintains the same level of provision of public services. One makes those sorts of assumptions, recognising that the Government may do something different like, for example, increase benefits by more or even less than the rate of inflation or freeze them if it is dealing with difficult fiscal circumstances.

It is necessary, as part of the planning process, to produce good forecasts and these can be called no-policy-change forecasts. What we are saying is that informative no-policy-change forecasts would be developed on a stand still basis, outlining what it would cost to continue to do what is being done at present while completely distinguishing that from policy. We do not accept the criticism that until they are passed in the budget, one cannot talk about them because they are for two different purposes.

I agree with Deputy Doherty that there was some confusion about our estimates of fiscal space in advance of the election campaign.

There was general confusion but I do not think it was on the advisory council's side.

Professor John McHale

I was a little surprised by the confusion. Essentially the point we were making, while largely accepting the net fiscal space number produced by the Government - we produced our own for internal purposes which was broadly in the same ball park - was the stand still one. We were pointing out that a substantial chunk of the fiscal space would be required just to stand still. We probably made a tactical error in doing the subtraction because then there was another number for the fiscal space floating out there. It would have been better to say this is the net fiscal space figure, the Government did a good job in estimating it and this is the amount of it that would be required to stand still. Then parliamentarians and others would have had better information in terms of understanding what the real scope was for truly new initiatives beyond what was being done already. That would be important information from the point of view of scrutinising Government plans and coming up with alternative suggestions. In a sense, the two points are linked.

In terms of providing information to the committee, we are completely non-political and have to tread carefully. We try to respect our mandate but certainly at the level of the secretariat of the council, we are very open to talking to anyone about technical details, which is what I think Deputy Doherty is talking about.

Professor John McHale

I know his office has availed of that in the past, as have others. In terms of technical discussions with the secretariat - as opposed to the council itself which must be a bit more careful - on things like the budget or the SPU, we are open to that.

I will start by agreeing that the council's submission is spot on, although there are one or two parts with which I might disagree. The second half of page four and all of page five of IFAC's submission pretty much nails the analytical opportunity. It is the bit that is missing. Deputy Doherty, myself and many other members of the finance committee begged the previous Government for that information. We asked the Government to show us what the fiscal space was before policy changes with socio-demographics and inflation included and what it proposed to do. We also asked it to tell us how what it proposed to do, on an item-by-item basis, would affect the available fiscal space. We could not get any movement on it in five years. The way the council has laid that out on pages four and five is spot on in terms of the information the Oireachtas and the standing committee will need to do its job.

My first question is simple and relates to the SPU. There is a debate as to how much time the committee would get with the draft SPU before it is sent off to the European Commission. The proposal from the Minister is five to ten working days, as I understand it.

I think it is ten days.

It is about ten but that is not remotely enough time to interrogate it, be briefed on it, hear submissions from the advisory council and others on it, come up with recommendations and then leave the Minister and his officials with enough time to deliberate on those recommendations and incorporate them into the SPU. It was suggested that the committee would take the draft SPU at the same time as the council but two reasons were put forward by the Minister for not doing that. The first was that the IFAC might change the SPU and, therefore, the committee would be given information that might change and the second was that things change and that the less time we have it, the more accurate the information contained therein. I do not accept either of those arguments and would like to hear Professor McHale's view as to whether they are reasonable. Would the council have any issue with the committee getting the SPU at the same time as the council, with the obvious caveat that it might make recommendations to change some elements of it?

The second question is on the budgetary office. Professor McHale has laid out three possibilities in terms of costings - one is that the budgetary office does all of the costings; another is that it acts as a clearing house; and the other possibility is in between those two. There is an interesting debate about who should do the costings. From a cost perspective to the Oireachtas, staffing a parliamentary budget office to do independent costings of the Departments would be very significant. There would be very serious duplication implications because they not only have to be able to cost taxation measures but other measures like transport, health care, social protection and broadband. Professor McHale has laid out three possibilities. The path of least resistance is that the Departments would continue to do the costings and the parliamentary budget office would provide quality assurance and some air traffic control. For example, if Deputy Boyd Barrett and I were looking for largely similar costings, the budgetary office might be able to do one for us. What is Professor McHale's view on this? Is there any issue with the Departments doing the costings and having the parliamentary budgetary office acting in a co-ordination and quality assurance role?

My final question goes back to what has been raised a number of times on the amount of information. The Commission's annual growth survey was published in December, followed by the SPU, which was then followed by the spring economic statement. Somewhere in between all of that were the Estimates and Revised Estimates and after that the taxation papers. After that there will probably be some pre-budget document and then there will be the budget. The budget is laid across three separate places - taxation, social protection and expenditure. It goes on and on and there are many different moving parts. Is it possible to bring all of it together? We do not have a comprehensive document with both macro and micro data in it.

On page 4 of his submission, Professor McHale laid out the amount of budgetary space available if we do nothing; what happens if we account for socio-demographics and inflation; and what the Government is proposing to do. It then moves from a macro view to a micro view that gives the ten big ticket items, for example a change to the minimum wage and health care. I have a concern that the committee will drown in well-intentioned information. All the bits are in different places. The Estimates, Revised Estimates, social protection and taxation are all in different places. Is it possible to start consolidating this to a master document that would allow a committee get its collective head around the entire position?

Professor John McHale

Deputy Donnelly asked some very important questions. Mr. Michael Tutty mentioned earlier that we do not get the SPU early. We only get the macroeconomic forecasts because our function is limited at that point to endorsing or not endorsing those macroeconomic forecasts so that is all we see. We get a spreadsheet and we get a detailed presentation from the Department of Finance which is the same presentation that members get. It has been stated we are in a privileged position and see the SPU in advance but we see it at the same time as everybody else. Deputy Donnelly should not get hung up on the timing of access to the SPU and getting it a bit earlier. The Deputy mentioned page 4 of our submission and the focus should be on the content of the SPU rather than on getting that content early. Members of the committee will then have a period of time before the budget is passed to really scrutinise and potentially influence what will happen in the budget.

There still seems to be an awful lot of time involved. In those weeks before the SPU, a plan is being set out but the decisions are not really being made at that point. The emphasis should be on the content rather than the timing. There is a process and a budgetary cycle which cannot all happen at the same time. The Deputy is almost trying to get away from that with the big-bang-budget approach of detailed plans and forecasts early in the year to avoid information overload so members can absorb the information they need. The Deputy makes a very good point about that but to have time to really influence the budget requires a staged process. Trying to come up with one master document would seem to be difficult in that regard.

The Deputy is right that the details of the division of labour between the budget office and the various Departments would have to be worked out. The model would probably involve a lot of the work still being done by the Departments and the worry is that the model is very under-resourced. It should be a strong, independent body with a very strong reputation. There are international models and the Office for Budget Responsibility, OBR, in the UK is a very good example, about which the committee will be hearing soon. It requires strong leadership, potentially international leadership, and it has to be well-resourced, with access to expertise including secondments. It also requires very strong access to information. Attention must be paid to the foundation of the office because the way it is established will have a huge effect on what kind of office it will be. I worry that there is too little ambition being shown at the moment to put it in place on a very solid foundation.

Mr. Michael Tutty

I do not advocate trying to duplicate what the Departments or the Revenue Commissioners are doing. The PBO needs to be able to assess whether measures look reasonable or not and be able to go back if it does not think they are. It has to be able to go beyond just the static costings of a measure to see what further effects it has beyond the first round effects so it can simulate its effect on the economy as opposed to just the basic tax effect. We have to look at what more the budget office can do apart from the static costings that come from the Departments. The committee should look at whether it needs to do a cost-benefit analysis of things that go well beyond what the Departments give. It seems from the proposals that the budget office would merely be passing on things they get from Departments rather than playing a real role in helping Deputies to understand what is going on or what more they can do.

I thank the witnesses and their staff for attending. Once the committee is up and running, I am sure we will see plenty more of each other. I thank them for coming before us this morning.