I am pleased to have the opportunity to appear before the select sub-committee today in connection with the 2014 Estimates for my Department and for the offices under the ambit of my Department, including the Revenue Commissioners, the Appeal Commissioners and the Comptroller and Auditor General.
I record my thanks to all the officials at the Department who worked together to continue to meet all the demands placed on them in 2013, including delivering a very successful Presidency agenda, introducing a budget under the new European cycle, positively interacting with the Irish Fiscal Advisory Council and managing the elements of the troika programme to leave the country in a position where we could successfully exit the three year EU-IMF programme of financial support, an economic transformation that allows us to remain unique, at this stage, in the EU and eurozone.
The Department has achieved important objectives during the year in a number of policy areas as targeted in the Statement of Strategy 2011-2014. Our success in achieving these objectives was facilitated, in large part, by changes in how we worked. This included the development of an integrated business planning process, which ensured resources were directed towards key priorities, the filling of senior appointments and a focus on training and development to ensure staff are appropriately skilled to meet the challenges. This thrust will continue during 2014.
We are committed to increasing transparency and openness, including regular reporting against targets, and outreach to our national and international stakeholders to better inform our policy development. The statistics bear this out. During 2013, my Department received 5,866 parliamentary questions, processed 220 freedom of information requests and processed 302 Government memos. In addition, my Department facilitated a number of consultation fora to extend the scope of our external interfaces.
In line with this we have enhanced our communications strategy, launched a renewed website, and are publishing more of our policy papers and discussion documents, including detailed analysis on the effects of the pharma-cliff, an international tax strategy, and a report on the research and development tax credit review, with the goal of ensuring the Department's message reaches a wider audience and generates informed debate. The report card that we update weekly has proven a very useful means of communicating effectively with both the public and professionals interested in our continuing progress.
Before we commence our discussion of the 2014 Estimates, I would like, if I may, to touch briefly on the key outputs of the Department during 2013.
Looking briefly at initiatives in the banking sector, 2013, it is worth remembering, saw the delivery of a number of policy initiatives as well as a reduction in the State's exposure to the banking sector. During the year, my Department extinguished the eligible liabilities guarantee, the so-called bank guarantee, which has generated some €4.3 billion in fees and income for the State. My Department also returned some €4.5 billion to the State, through the successful sale of Irish Life, along with an additional dividend, the sale of contingent capital, CoCo, notes and preference shares in Bank of Ireland, both of which were sold at a slight profit. In addition, the entry of IBRC into special liquidation enabled a restructuring of the promissory notes, with associated benefits for the Exchequer.
We have seen the State, through the NTMA and the banks themselves, successfully access the international capital markets through bonds and, in the case of the banks, covered bonds and securitisations, at lower margin premia that reflect the significant progress that has been made. Across the broader financial landscape, legislation has been introduced promoting reform of the credit union sector with the establishment of the ReBo, NewERA was established and legislation to establish the strategic investment fund has commenced and will continue to be a focus during 2014.
The Government recognises that SMEs are the lifeblood of our economy and play a crucial role in employment growth. A key priority of the Government is to ensure an adequate pool of credit is available to fund SMEs in the real economy. In terms of bank lending, both AIB and Bank of Ireland had a €4 billion lending target in 2013. The recent Red C demand survey indicates that the banks are approving 80% of credit applications, which is in line with their European counterparts. For those businesses which have their credit applications turned down, the Credit Review Office continues to provide a vital service and is overturning 55% of bank refusal decisions. I increased the CRO appeals threshold from €500,000 to €3 million in budget 2014 to ensure a broader range of SMEs could utilise this facility.
The access to finance chapter of Action Plan for Jobs 2013 contained a number of commitments to assist the SME sector, which the SME State bodies group, chaired by my Department, has overseen to completion. These included the monitoring and implementation of the ten point tax plan for the SME sector; the recruitment of additional reviewers to the CRO; and the establishment by the National Pensions Reserve Fund of three SME funds to make €850 million available through the provision of equity, credit, and restructuring investment. In addition to some positive developments in the area of bank lending, the Red C survey also indicated that 2013 saw an increase in the levels of employment, profitability and turnover in the SME sector and I will strive to ensure these positive trends continue into 2014 and beyond.
Attracting increased flows of funding from capital market and institutional investors and effectively channelling it towards long-term investment and the SME sector must be a core policy priority for Europe. This is why we made non-bank funding a key policy priority of our recent EU Presidency. The Secretary General of my Department was appointed co-chair of the Commission's high level expert group on SMEs and infrastructure financing. The group‘s final report, Finance for Growth, contains a broad suite of recommendations for European policymakers that are designed to diversify funding for SMEs. Ensuring viable SMEs have access to a stable supply of credit is also a central element of the medium-term economic strategy. In particular, the strategy outlines the importance of developing a more diversified and stable financial system. Such a system must be premised on a competitive and profitable banking sector and increased direct capital market financing of enterprises, including SMEs, with greater involvement by institutional investors, multilateral banks and alternative financial markets.
Another area in which we made progress, and where it will be important to make even further significant progress this year is the problem of mortgage arrears. A comprehensive strategy to tackle the problem is in place and the implementation of this strategy is of prime importance. In that regard, the new personal insolvency system and the full implementation of the Central Bank mortgage arrears resolution targets, MART, process are fundamental. As statutory regulator, the Central Bank has the power, from both a prudential and consumer protection perspective, to require banks to address mortgage arrears cases on their books meaningfully. It will no longer be acceptable for banks to apply short-term solutions to cases where there has been a fundamental and long-term change in the position of the borrower. Durable long-term restructures will have to be applied, having regard to the circumstances of individual cases. The mortgage arrears data for the end of November 2013 in respect of the six MART banks, published by my Department on 9 January, show there is an increasing number of permanent restructures being put in place by banks. However, it will be necessary for banks to build on this significantly in 2014. The fact that the new insolvency frameworks, in particular the personal insolvency arrangement framework to address unsustainable mortgages or other secured debt, are operational should provide a further incentive to banks to move to address the mortgage problem in a definitive way this year.
My Department also took a lead role in the roll out of the national payments plan. This plan, which was approved by the Government in April 2013 and is overseen by the Central Bank, aims at making savings of up to €1 billion annually to the economy by increasing the use of electronic forms of payment such as debit cards and electronic banking. The year 2013 saw a number of initiatives under this umbrella, including a rounding trial to test public reaction to removing 1 and 2 cent coins from change. This trial was undertaken over two months, up to mid-November, and the Central Bank is finalising a report on the outcome, which I expect to receive shortly.
The project team also launched eDay, the date in September 2014 when Departments and agencies will discontinue the use of cheques in their dealings with businesses. A pilot project was undertaken to test reaction to a standard bank account, which would be attractive to the financially excluded, and the Government has recently published a paper on the outcome of this project.
A major initiative at the European level is the single European payments area, SEPA. This comes into effect from 1 February 2014 and will considerably ease cross-border payments between EU countries, providing a major incentive to increased business activity. Members will be aware that the European Commission has published a proposal to allow an additional six months transitional period for all payments, up to 1 August 2014. Agreement of the European Council and of the European Parliament to this proposal is awaited.
Ireland held the 7th Irish Presidency of the Council of the European Union between January and June of last year and the Department of Finance played a lead role in many areas of what was widely acknowledged to have been a very successful Presidency. I presided over six formal ECOFIN Councils and one highly successful informal ECOFIN in Dublin. The Presidency had significant achievements in its engagement with the European Parliament and with the European institutions. Running a successful Presidency has helped improve the relationship between Ireland and Europe and its institutions which we can build on to improve further Ireland's influence in Europe.
In terms of achievements, agreement was reached on a number of important dossiers. In economics, the final part of the economic governance measures for the eurozone, the two-pack regulation, was agreed, and we successfully managed the European semester process. These are important in ensuring financial stability in the eurozone. In financial services, we prioritised work on the banking union proposals designed to break the link between the financial sector and the sovereign. The main achievements were agreement on the capital requirements directive and regulation, the single supervisory mechanism and banking recovery and resolution.
There was also agreement on a range of other financial services dossiers, for example, the regulation on markets in financial instruments, MiFIR and the markets in financial instruments directive, MiFID.
In taxation we obtained a decision on enhanced co-operation to allow for discussion on the financial transaction tax. Anti-fraud measures were agreed for VAT. There was agreement on Council conclusions to combat fraud and tax evasion and on adoption of a negotiating mandate on savings taxation agreements agreed for third countries. My Department also significantly contributed to work on the multi-annual financial framework for 2014-2020, achieved agreements on other EU budget measures and set the stage for further budget discussions during the Lithuanian Presidency.
The year 2013 represented another significant stage on our road to economic recovery. Although economic data from the first half of last year were somewhat disappointing, recent figures have been more encouraging. The economy returned to growth in the second quarter of 2013 and the Central Statistics Office quarterly national accounts released before Christmas show that in quarter 3, GDP grew by 1.5% in quarterly terms. Revisions to the data also show a stronger second quarter, with plus 1% quarter-on-quarter than previously estimated. In year-on-year terms, GDP grew by 1.7% in the third quarter of the year. Overall, the figures are in line with the budget forecast of modest growth of 0.2% last year, with growth expected to pick up to 2% this year.
Given the open nature of the Irish economy, our economic performance is heavily reliant on external developments. Private consumption still fell in year-on-year terms in the third quarter of 2013 but exports rose. The growth in exports occurred in spite of the patent cliff in the pharmaceutical sector, which is still impacting merchandise exports. However, the effect on employment is likely to be limited. The domestic economy growth, in particular recent growth in construction, is welcome. Labour market performance has been positive recently and appears to have de-coupled from GDP. Employment in the third quarter increased by 1.2% or 22,500 relative to quarter 2 of 2013, marking a fourth successive increase in quarter-on-quarter terms. As a result, employment in the third quarter of last year was 3.2% or 58,000 persons higher than in the same quarter of 2012. This is the largest annual increase since quarter 3 of 2007.
Ireland exited the EU-IMF programme of financial support on 15 December and did so without the need for a prearranged backstop. Our exit from the programme is the result of the commitment and determination of the people to get the job done. The programme has met its key objectives, namely, to put the public finances back on a sustainable path, to restore financial sector feasibility, to return Ireland to financial market funding and to raise growth potential. The economy is recovering, the public finances are under control, the banking system is restructured and well-capitalised and, most important, jobs are being created. Market confidence in Ireland is high and we made a full return to normal market funding earlier this month. This is an important milestone on Ireland's recovery and will send a further signal that Ireland is recovering, returning to normal market funding and building for a sustainable future.
The recently published December Exchequer returns saw tax revenues grow by 3.2% year on year. Strong income tax receipts from PAYE workers and the self-employed are encouraging and are consistent with recent data on the recovering labour market. Additionally, expenditure remains below profile in most Departments. These returns give confidence that, once again, Ireland will meet and indeed better its fiscal target in 2013.
Looking to the future, budget 2014 targeted a general government deficit of 4.8% of GDP. While all the targets under the excessive deficit procedure have been met to date, 2014 will be the first year we will be actively seeking to overachieve the target. This overachievement will form a prudent buffer to allow for any possible external shocks to the economy and will reassure the markets of Ireland's steadfast commitment to restoring the sustainability of the public finances.
Within the Department we established a risk and stability unit, which is responsible for monitoring internal and external risks and proposing corrective action as appropriate. In light of our emergence from the EU-IMF programme, we are keen to remain vigilant, learn the lessons from the past and continue to embed a risk-focused culture within the Department. The work of this unit as well as related changes to the governance structures of the Department will ensure my Department maintains a balanced approach towards developments, nationally and internationally, as they occur.
The business of the committee today relates to the funding allocation sought for the Department of Finance group of Votes. For 2014 this totals €358 million and compares with a 2013 Vote group total of €362 million. Of this, some €31 million relates to Vote 7, which provides for the administrative and non-administrative costs of the Department of Finance, a reduction of €2 million compared with 2013. This arises largely because 2013 contained once-off costs relating to the EU Presidency.
Almost 60% or €19.2 million of the gross Estimate for my Department is provided to cover salaries and allowances, with a further €4 million to cover facilities and non-pay administrative costs. A large portion of this relates to over 70 of the total complement of staff who work in shared services, that is, payroll, pension, banking and financial management services to other Departments. We expect to see these costs reduce in the coming years as these services transition to the shared services Vote. My Department has utilised economies of scale in these areas, delivered significant savings to date and worked within a prudent budget in 2013.
The remainder of the gross Estimate is provided to enable the Department to widen its engagements at an international level, to be proactive in addressing policy issues and to secure a robust banking system and economic climate. The focus will be on providing support and expertise to continue the policy of promoting domestic lending, analysis of the property market and developments within the international financial services sector, a review of which is taking place that the Department has been asked to lead.
Vote 8, the budget of the Office of the Comptroller and Auditor General, is applied towards a single programme with the following outputs: auditing the financial statements of public bodies and issuing audit opinions; control of issues from the Central Fund; and examining and reporting on financial management arrangements in public bodies and the value for money of public services. The committee will be aware that the Comptroller and Auditor General also assists the Committee of Public Accounts in it scrutiny of the public finances.
Vote 9, Office of the Revenue Commissioners, has requested a budget allocation of €320 million, a reduction of 2% compared with the 2013 allocation of €323 million. The year 2013 saw the successful implementation of the local property tax, the largest self-assessment system in Ireland to date. The 2013 LPT compliance rate currently stands at 91%, with €242 million collected in respect of 2013 and €76 million collected in respect of 2014.
Revenue achieved similar high levels of compliance for the other taxes and duties which are placed in its care and management, while also providing a high quality customer service to facilitate taxpayers in meeting their tax obligations. It extended its range of digital services for compliant businesses, for example, the new diesel rebate system, met broader environmental changes, such as the single euro payments area introduction, while at the same time reducing the administrative burden on business. However, non-compliance is an ever-present challenge for Revenue and significant resources are now deployed to target risk throughout all sections of the economy. Through targeted and risk-focused compliance interventions, Revenue continued to pursue those who do not meet their tax and duty obligations.
To detect those involved in tax evasion, shadow economy and smuggling activities Revenue used "big data" and innovative technology such as social network analysis and predictive analytics. It is important to underline the crucial role played by an effective and modern tax and customs administration in achieving the Government's fiscal consolidation programme and Ireland's exit from the bailout and, in this regard, I would like to commend Revenue for their achievements in 2013.
I thank members for their attention and I commend the Estimates for the finance group of Votes to the committee.
